On February 10, 2022, Brookfield Asset Management Inc.’s (NYSE: BAM, $56.44, Market Capitalization: $88.2 billion) CEO Bruce Flatt in a letter to shareholders, following the 4Q21 announcement, revealed that the company is considering options, including spinning off its asset management business into a separate public company. Post Separation, the asset management division will be a pure-play alternative investment firm that would generate revenues through the collection of management fees from institutional investors. On the other hand, BAM will focus on growing its newly launched reinsurance and investment operations through $50 billion (net of debts) directly owned assets across real estate, infrastructure, renewable energy, credit, and private equity.
During the 4Q21 conference call, the management clarified that if they pursue separation, it will be independent security and a listed company, not a tracking stock. However, the parent entity would continue to own a part of the separated entity and initially distribute a quarter or a third part of the business to its shareholders.
BAM believes separating its asset management business would provide the unit with further growth avenues. Consequently, the BAM parent unit will look to grow its reinsurance and investment operations and opines that separating a part of the asset manager, would allow investors to own separate security that would be a “asset light” business model.
While BAM conveyed its intention to separate the asset management business, it will be evaluating various options (including possibly doing nothing) that will maximize value for various stakeholders. The company is going to provide further information in due course of time, while it also seeks views from the public and shareholders regarding separation.
Based on comparable multiples of pure-play, “asset-light” alternative investment managers, BAM estimates its asset management business would likely to have an equity value in the range of $70 to $100 billion (or $45-$60 per share). This excludes the equity capital of $50 billion net (or $30 per share) that BAM has invested in various businesses.
In July 2021, BAM completed the acquisition of all of the limited partnership units of Brookfield Property Partners LP (Nasdaq: BPY) in a deal valued at $6.5 billion, taking its real estate arm private. This deal has strengthened BAM’s overall real estate portfolio. BPY owns, operates, and develops one of the largest portfolios of real estate across the globe that includes, office, retail, multifamily, logistics, hospitality, triple net lease, manufactured housing, and student housing.
In September 2019, BAM completed the acquisition of the majority stake in Oaktree Capital Group in a deal valued at about $4.7 billion. This deal has strengthened BAM’s overall fee-bearing alternative asset portfolio and broadened product offering.
BAM expects separation of asset management business would simplify the company’s structure and allow shareholders to own a business that would be an “asset-light” model. Currently, the asset management business also manages BAM’s $50 billion of directly owned net assets that the parent entity has been able to accumulate over the decades through retention of profits as well as growth in asset values.
BAM in its shareholder letter highlighted that their current business model makes it “asset-heavy” as compared to most other asset managers which are “asset-light” as those are either recently established or have distributed their profits annually to their owners. The management believes distributions from its $50 billion owned investment capital to shareholders, would easily turn their business asset-light, but this capital has proved to be their operating strength. However, the management believes that their current structure makes it difficult for an investor to value the company.
Blackstone Group, one of the most valuable private equity groups does not represent any direct investments on its balance sheet as all their investments are done through an investment vehicle under asset management, which receives management fees for managing investments. On the other hand, BAM being “asset-heavy” derives significant value from their directly owned assets. We believe, directly owned assets are relatively difficult to value. As a result, BAM has been trading at a lower multiple compared to Blackstone in recent years. In our view, separation of asset management business would unlock enormous amount of shareholder value as it would be easier to value the company and attract higher multiples.
In addition, in its shareholder letter, BAM highlighted that its asset management business is one of the largest and fastest-growing scale alternative investment businesses globally. Over the years, the business has shown tremendous growth and profitability, supported by BAM’s internal capital. The management believes the assets management unit has become self-sustaining, where its annuity-like cash would allow it to operate independently without much dependence on internal capital.
We believe the acquisition of Oaktree Capital in 2019 was an inflection point for BAM’s asset management business, post that it was able to significantly broaden its offerings across various strategies. The overall fee-bearing capital across the alternative asset classes grew from $126 billion in 2017 to $364 billion in 2021. Fee-related earnings (excluding performance fees) more than doubled from $754 million in 2017 to $1,742 million in 2021. The management opines, now the business has reached to compelling growth stage, where it could strategies upon future growth options as many of their previous strategies are continuously getting larger with each vintage and are compounding on each other.
Brookfield Asset Management (BAM) is a leading global alternative asset management company with ~$690 billion asset under management and presence in 30+ countries across five continents. The company’s segments include Asset management, Real estate, Renewable power and transition, Infrastructure, Private equity, Residential development, and Corporate activities.
The segment manages $364.1 billion of fee-bearing capital, including $169.3 billion in long-term private funds, $114.6 billion in perpetual strategies and $80.2 billion in Liquid strategies on behalf of investors. The asset management segment also manages BAM’s $50 billion of directly-owned net assets. The segment derives revenues from recurring long-term fee and carried interest on achieving targeted investment returns.
The company operates real estate primarily through a 100% ownership in Brookfield Property Group (BPG), formerly known as Brookfield Property Partners (BPY), a 27% interest in a portfolio of operating and development assets in New York and an 18% direct interest in their third flagship real estate fund (“BSREP III”). In July 2021, BAM completed acquisition of all of the limited partnership units of BPY, taking the company private. Currently, BPG’s preferred units are listed on Nasdaq and Toronto Stock exchanges under ticker BPY. BPG own and operate iconic properties globally, and its portfolio includes office, retail, multifamily, logistics, hospitality, triple net lease, manufactured housing and student housing.
Renewable Power and Transition
The company operates renewable power assets through a 48% stake in Brookfield Renewable Partners (BEP), which is listed on the New York and Toronto Stock exchange. The business owns one of the world’s largest renewable power platforms with generating facilities in North America, South America, Europe, and Asia. The division’s operating activities include developing, operating, and owning the hydroelectric, wind and solar energy assets as well as energy transition arrangements and energy contracts.
The company operates infrastructure assets through a 27% stake in Brookfield Infrastructure Partners (BIP), which is listed on the New York and Toronto Stock exchanges. The segment is one of the largest owners and operators of critical and diverse global infrastructure networks. The segment’s principle operations include Utilities (transmission and distribution of electricity and natural gas), Transportation (transportation of freight, commodities and passengers through road and railroad network), Midstream (natural gas transmission and storage services), and Data (operating and managing telecom towers and data storage facilities).
The company operates private equity assets through a 64% ownership in Brookfield Business Partners (BBU), which is listed in NYSE and Toronto Stock exchanges. BBU is company’s flagship private equity perpetual strategy that invests primarily in business services and industrial companies focused on long term capital appreciation.
The company operates residential development business predominately in North America and Brazil. North American business is conducted through Brookfield Residential Properties, which is involved in construction of homes and selling lots to other homebuilders, while Brazilian business includes construction, sales and marketing of a broad range of residential and commercial office units.
The company’s corporate activities offer support services to overall business operations. These activities includes development and seeding of new fund strategies, supporting the growth in company’s listed affiliates, and providing liquidity to the organization.
For FY21, revenue grew 20.7% YOY to $75.7 billion. Funds from operations (FFO) increased 45.9% YOY to $7.6 billion, supported by growth in asset manager earnings, strong same-store growth from principal investments, and gains on asset monetization. Distributable earnings for common shareholders grew 48.9% YOY $6.3 billion, driven by $71 billion of capital inflows, strong performance from principal investments, and significant carried interest and gains generated from $42 billion of asset sales.
Fee-bearing capital increased by 47.2% YOY and reached $364.1 billion. Fee-related earnings grew by 33.0% YOY to $1.9 billion, realised carried interest rose to $927 million (FY20: $411 million) and accumulated unrealised carried interest balance stood at $7.7 billion (FY20: $4.0 billion)
Net Income stood at $12.4 billion (FY20: $0.7 billion) and corresponding margin expanded ~1,523 bps to 16.4%. Net income attributed to the BAM shareholders grew to $4.0 billion (FY20: Net loss of $134 million). Diluted EPS increased to $2.39 (FY20: loss per share of $0.12).
At the end of December 31, 2021, BAM had total capital of $92 billion to be deployed into fresh investments.
Revenue increased 27.5% YOY to $21.8 billion. FFO increased 23.3% YOY to $1.1 billion, while distributable earnings for common shareholders fell 20.3% YOY $1.3 billion. Fee-related earnings for 4Q21 grew 34.3% YOY to $552 million and realised carried interest fell by 30.5% YOY to $182 million.
Net Income increased 90.7% YOY to $3.5 billion (consensus: $1.1 billion) and corresponding margin expanded ~526 bps to 15.9%. Net income attributed to the BAM shareholders grew 73.9% YOY to $1.1 billion (4Q20: $643 million). Diluted EPS grew to $0.66 (4Q20: $0.40).
Brookfield Asset Management Inc. (Parent)
Brookfield Asset Management Inc. (BAM) is a leading global alternative asset manager with $690 billion of assets under management (AUM) across real estate, infrastructure, renewable power and transition, private equity, and credit. The company offers a range of alternative investment products to investors around the world—including public and private pension plans, endowments and foundations, sovereign wealth funds, financial institutions, insurance companies and private wealth investors. It operates in more than 30 countries and employs ~150,000 people.
Asset Management (Spin-Off)
Asset Management business manages long-term, private funds, perpetual strategies, and public securities on behalf of investors and the parent company. As of December 31, 2021, the Asset Management business managed $364 billion of fee-bearing capital, from which it earns recurring long-term fee revenues. Fee revenues include management fee on third party capital in its closed-ended and perpetual private funds, and perpetual fees based on the total capitalization of the listed companies, incentives from Brookfield Infrastructure Partners (BIP), Brookfield Renewable Partner (BEP), and Brookfield Property Group (BPG), and performance fees linked to the unit price performance of Brookfield Business Partners (BBU) and other transaction and advisory fees.