Maria Vonotna
Investment thesis
As I wrote in my previous article after the third quarter results, Brookfield Asset Management Ltd. (NYSE:BAM) is well placed to gain big from the recent asset valuation drop. I still stand by this thesis. BAM’s diversified business model helps it to sustain growth and invest capital even during challenging economic times. This strategy allows the company to remain competitive in changing markets and economic cycles. For investors with capital to invest during distressed times, financial markets have usually provided excellent risk-adjusted returns. BAM has been using economic cycles for decades to invest during economic downturns. The company has set 2 strategic directions for the upcoming years: decarbonization and deglobalization.
Fourth Quarter Results
Following the IPO of 25% of the asset management business, which is now trading as BAM, this was the first earnings call the management held. Despite numerous challenges in 2022, it was a remarkable year for the company – recording record performance for the business. The fourth quarter distributable EPS ($0.35) outperformed expectations by 9.4% and also surpassed the EPS of Q4 2021 ($0.33) by 6%. Fee-related earnings exploded during 2022 and increased by 26% from $1.67 billion to $2.1 billion by the end of the year. BAM also raised $93 billion of capital, which is 30% higher than last year. Currently, the assets under management by BAM are around the mark of $800 billion. At the end of the year, the company had a total of $418 billion in fee-bearing capital, a 15% rise on a Y-o-Y basis.
The management is openly denying any M&A activity for 2023 and I also believe they do not need to spend shareholder funds on unnecessary acquisitions because they can grow organically. Bruce Flatt, CEO of BAM said:
“To be able to do M&A, it means that you are selling something of what we own today and buying something of something else because we have a small amount of cash…. (a company) needs to hit a very high test (to be acquired by BAM). But we don’t have any expectations of something happening in 2023.”
The extensive growth of their flagship funds is likely to grow in 2023 as well despite the high-interest rate environment. Brookfield also declared a quarterly dividend of $0.32 per share payable on March 31, 2023. It seems to me that the management is going to continue the “old” BAM’s dividend policy of paying reliable dividends to its shareholders.
2 major trends BAM is betting on
The management has strategically aligned the company to take advantage of the deglobalization, and decarbonization trends. The management believes these new trends will need trillions of dollars’ worth of investment over the coming decades so BAM can heavily capitalize on these 2 major trends.
Decarbonization
The Brookfield Global Transition Fund is greatly benefitting from macroeconomic trends and has seen a large influx of investments since its inception. It is anticipated that this fund will grow to surpass $200 billion within the next decade. Global Transition Fund 1 is the largest energy transition fund on record and it closed on $15 billion last June. A large part of the Global Transition Fund portfolio focuses on renewable energy developers from the U.S. who are currently taking advantage of IRA benefits, including the purchase of Westinghouse which is experiencing great success due to decarbonization and deglobalization. BAM has decided to launch a bigger fund, Global Transition Fund 2 in the first half of 2023 so investors can expect at least $20-25 billion in inflows into the new fund. In addition, Brookfield Renewable is a major investor in renewable sources of energy. The fund possesses $75 billion worth of assets and 135,000 megawatts of capacity in multiple stages of operations or developments across the globe. That means Brookfield Renewable (BEP) is among the largest renewable companies in the world.
Deglobalization
The company also focuses on the new deglobalization trend, companies bringing back manufacturing capacities to home countries, trying to depend less on other (non-friendly) nations, etc. Brookfield’s private credit businesses, its real estate, and infrastructure mezzanine debt funds are moving in this new direction. The Infrastructure Debt Fund invests in transport, data, utilities, and midstream sectors. It finances data centers in Latin America, digital connectivity in India, and many infrastructure projects in the U.S. Part of the Global Transition Fund portfolio, Westinghouse has been signing deals with many European nations to dismantle old soviet RBMK reactors and to build new Westinghouse AP1000 reactors. In addition, many Eastern-European nations were dependent on Russian uranium fuel capsules and due to the Ukrainian war, many of them replaced Russian suppliers and signed contracts with Westinghouse.
The company’s next year’s growth will likely be fueled by inflows from its new funds. In addition, investors should continue to see growth from the expansion of BAM’s perpetual strategies, particularly the successful super-core Infrastructure strategy, for which investor demand remains strong.
Company-specific Risks
There are some smaller risk factors that investors should know. The high-interest rate is one of them both on the expense and the income side. A longer than expected high-interest rate environment can elevate the company’s interest expense and at the same time decrease its fund’s attractiveness because high coupon alternatives are available for investors. The company also uses strategies to lower its credit risk and boost its credit ratings.
When it comes to default risk, it is tied only to the particular project and not the complete company. In cases where a project fails or there isn’t enough money to repay the debt, the bank simply takes possession of that asset instead of pursuing repayment from higher levels within the corporation. With the help of this debt structuring BAM can keep its financing costs low and “outsource” its bad apples in case of a default. However, investors must be aware of this tactic that the management uses, and will very likely keep using in the future, despite the BN and BAM separation.
Valuation
BAM is slightly undervalued based on discounted cash flow analysis. I calculated a discount rate of 8.3% and a terminal growth of 5%. BAM’s discounted cash flow price is approximately $39 which is 9% above its current price.
alphaspread.com
Final thoughts
The management is focusing on major trends in the world as they did in the past. New funds and strategies have been developed to capitalize on deglobalization and decarbonization. Distressed asset prices have always helped BAM in the past and I believe they will be able to make great money in the upcoming years. I also think that their leading position in green energy will give them a strategic moat in the long term so I retain my buy signal for BAM.
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