Brookfield is a leading global alternative asset manager with approximately $725 billion of assets under management across real estate, infrastructure, renewable power and transition, private equity, and credit. Brookfield owns and operates long-life assets and businesses, many of which form the backbone of the global economy. Utilizing its global reach, access to large-scale capital and operational expertise, Brookfield 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. Brookfield Asset Management (BAM) has a high diversification in fee revenue and a high diversification among alternative asset classes that are normally not easily accessible to the everyday investor, as shown in the image below. You could therefore hold Brookfield as diversification in your investment portfolio since 1995 and earn an average annual return of 11.08%. However, besides the obvious reason for holding Brookhield Asset Management in your portfolio, which is diversification, there is more value to be found in the company. In the investment analysis below, I will argue and show why there is tremendous value to be found in Brookfield Asset Management and why I therefore have added the stock to my equity portfolio.
Brookfield Asset Management (BAM) has said it plans to publicly distribute 25% of its asset-management business to its shareholders before year-end, Chief Executive Officer Bruce Flatt said in a letter to shareholders as the firm issued first-quarter earnings. Brookfield Asset Management, Inc. engages in the ownership and operation of assets of its shareholder and clients with a focus on real estate, renewable power, infrastructure and private equity. It operates through the following business segments: Asset Management, Real Estate, Renewable Power, Infrastructure, Private Equity, Residential Development, and Corporate Activities. The Asset Management segment includes managing the listed partnerships of the company, private funds and public securities on behalf of its investors and the company. Basically, another day another spinoff stock.
According to management midpoint of valuation estimations: ”the Manager will in our view have a value of ±$80 billion (“trading price” may be more or less) and based on that will have a free float of ±$20 billion.” If estimations by management are correct, the value of the new spinoff company would be more or less equal to the value of the company now (trading at $50.24 per share and therefore a marketcap of $82.46 billion). Since conservatism is an important aspect of our investment philosophy, we check whether the valuation of $80 billion placed by management upon their newly spinoff company is reasonable. Based on my investment analysis below, however, I argue that a valuation of $80 billion seems reasonable and I therefore agree with management upon their valuation. This means that there is a significant investment opportunity to be found in Brookfield Asset Management, and conservative analysis shows investors can earn a potential return of 43% before year-end.
As shown in the image below, taken from the Q1 2022 supplemental information, we notice that Brookfield Asset Management has invested capital of $72.4 billion as of 31-03-2022. The invested capital yields annual cash flows of $2.9 billion (2021: $1.9 billion) and the balance of the earnings is retained for reinvesting in their investments, therefore growing the invested capital over time. Invested capital is up $13.2 billion, or 22.29% compared to 2021. Invested capital mainly consists of perpetual affiliates BEP, BIP, BBU and BPG; the flagship entities that hold most of the investments in the four largest operating segments:
- 48% of Brookfield Renewable Partners (BEP), one of the world’s largest publicly traded renewable power platforms with generating facilities in North America, South America, Europe and Asia.
- 27% of Brookfield Infrastructure Partners (BIP), one of the largest owners and operators of critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data.
- 65% of Brookfield Business Partners (BBU), our flagship private equity perpetual strategy that invests primarily in services and industrial companies focused on long-term capital appreciation.
- 100% of Brookfield Property Group (BPG), a diversified global real estate portfolio that owns, operates and develops one of the largest portfolios of office, retail, multifamily, logistics, hospitality, triple net lease, student housing and manufactured housing assets.
Based on IFRS valuations, the net invested capital is $38.5 billion but Brookfield Asset Management provides us with a blended valuation of net invested capital of $56.8 billion, saying to focus on the blended value as BAM has control over these assets and believe they could liquidate for these values. Based upon outstanding shares of 1,626.8 million this provides a net invested capital of between $23.67 – $34.93 per share for Brookfield Asset Management.
In Q1 2022, the Asset Management segment has earned fee-related earnings attributable to Brookfield shareholders of $501 million, up $88 million compared to Q1 2021 or an increase of 21.30%. For the last 12 months, fee-related earnings increased by $467 million towards $1,987 million, or an increase in earnings of 30%. The increase in fee-related earnings is primarily due to growth in fee bearing capital of $60 billion, or an increase of 19% for the last 12 months, bringing the fee bearing capital at $378 billion. According to management: ”We create value for our shareholders through increasing the value of our asset management franchise by: 1) increasing feebearing capital, which increases our fee-related earnings; and 2) achieving attractive investment returns, which enables us to
earn performance income (carried interest).” The annualized total fee-related earnings and carried interest have grown from $3.346 billion in FY21 towards $4.120 billion in FY22, or an increase of 23%. Both fee-bearing capital and fee-related earnings have increased significantly, as shown in the image below.
Based upon the valuation of $80 billion for the asset manager by management, this provides the stock with an p/e ratio of 19.41 which is fairly priced considering the 23% growth in earnings. We therefore argue that a valuation of $80 billion by management is accurate and reflects the growth potential within the asset manager.
In their Q1 2022 letter to shareholders, management expects that the special distribution of shares of the manager will be around $20 billion or approximately $12.00 for each share of Brookfield that you own at that time. Since a 25% interest in the asset management business will be listed this leads to a total valuation estimated by management of $80 billion for the to be spinned off asset management business, or $48 for each share of Brookfield that you own now. In essence, as a shareholder you will receive $12 per share of the new asset manager and $36 per share of value for the 75% stake in the manager by Brookfield Asset Management, or a total value of $48 per share.
In conclusion, the total value within Brookfield Asset Management therefore consists of $20 billion (25% spinoff distributed) + $60 billion (75% manager) + $38.5 billion (net invested capital) = $118.5 billion. Please remember that management values their net invested capital at $56.8 billion instead of $38.5 billion, which would put the total valuation at $136.8 billion. For conservative purposes, we will use the total valuation of $118.5 billion in our investment analysis. Given the current marketcap of $82.46 billion, this provides the investor with an approximately return of 43% and a fair value of around $70 per share of Brookfield Asset Management. Since the spinoff is expected to be completed before year-end (in 7 months), a 43% return in 7 months is an insane annual return. We note that our potential even increases towards a 65% return if we use management net invested capital valuation of $56.8 billion.
According to their Q1 2022 letter to shareholders, Brookfield Asset Management reports that their underlying investments are very resilient in an inflationary environment and continue to provide a compelling alternative to traditional investments. ”We don’t own the super high growth speculative technology related businesses which have been reevaluated in these markets. Our underlying operations continue to perform well, supporting stable and growing cash distributions. We received distributions from principal investments of $622 million in the quarter and $2.3 billion over the past year, representing 27% and 19% increases over the comparative periods. With inflation at a 40-year high, the margins increase—which means that inflation has a positive impact for owners of real assets and real return businesses. With approximately $725 billion of assets of this nature and prices up 10-20%, the value of our overall investment portfolio increases and the compounding effect over time is even more meaningful.”
As shown in the Table below, we notice that asset under management have increased annually with 26% CAGR and distributable earnings per share have increased annually by 19% CAGR for the 2018-2022 period. This shows that even without the planned spinoff, Brookfield Asset Management is a solid buy and therefore definitely belongs in our Eurykleia portfolio.
Based upon their investment portfolio that is very resilient in an inflationary environment, inflation at a 40-year high and the planned spinoff of the asset manager before year-end, Brookfield Asset Management seems highly undervalued. Fee bearing capital, fee-related earnings, net income, FFO, total asset under management and distributions to shareholders all are growing by 20-30% per year. The spinoff of the asset manager reveils the value to be found within Brookfield Asset Management and the observant investor can therefore potentially earn a return of 43% before year-end by investing in Brookfield Asset Management. In earlier blog posts, we already concluded that stocks of spinoff companies on average beat the market. Finding the best among the spinoff stocks could even provide investors with an even higher return. In this case, Brookfield Asset Management seems like a stock to hold onto for the coming years. Given the volatile market conditions, I am loading up on shares whenever I can.
Eurykleia Investments is not a registered investment, legal or tax advisor or a broker/dealer. All investment/ financial opinions expressed by Eurykleia Investments are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that the all information is accurate and up to date, occassionally unintended error and misprints may occur.
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