3 Reasons To Buy Brookfield Instead Of Blackstone (NYSE:BAM)

Brookfield Asset Management (NYSE:BAM) (NYSE:BAMR) and Blackstone (NYSE:BX) are among the very largest and best alternative asset managers in the world today, with $750 billion in assets under management and $940 billion in assets under management, respectively, as of the end of their latest quarters. While both look relatively attractive at the moment thanks to their strong competitive advantages and growth profiles, we prefer Brookfield. In this article, we share three reasons why.

#1. Brookfield Is Cheaper Than Blackstone

BAM/BAMR is overall cheaper relative to BX as its price to normalized earnings ratio is only 14.06x, compared to BX’s 19.95x normalized earnings ratio. Furthermore, both businesses are forecasted by the Wall Street analyst consensus to generate ~9% normalized earnings per share CAGRs through 2026.

BAM/BAMR also looks very cheap based on its price to estimated net asset value per share ratio of just 0.71x at the moment, compared to its historical average price to NAV ratio of 0.94x.

Meanwhile, BX is much more challenging to value on a NAV basis, given that it employs an asset-light business model. However, its price to normalized earnings ratio is slightly above its five-year average of 18.61x and its expected forward dividend yield of 4.44% is currently below its five-year average of 5.10%. While we remain bullish on BX given its growth prospects and competitive advantages, its valuation does not indicate any particularly attractive sale, whereas BAM/BAMR’s valuation looks quite attractive on both a historical and relative basis.

#2. Brookfield Is More Defensively Positioned Than Blackstone

While BX does manage a very well-diversified array of assets and businesses that position it well to deliver long-term attractive total returns for shareholders on a risk-adjusted basis, we believe that BAM’s portfolio is better positioned to weather the current environment.

A big reason for this is that BAM/BAMR has a significant concentration of its total assets under management in highly contracted and mostly inflation-linked infrastructure and renewable power assets. In fact, it has $205 billion in total assets under management in these categories, good for over 27% of its total assets under management. In contrast, BX only has $30 billion in assets under management in infrastructure and nothing major to speak of in renewable power production assets, making up a meager ~3% of total assets under management.

Given that we are facing stagflation (i.e., slow to negative economic growth and stubbornly high inflation) across most of the major economies of the globe at the moment, BAM/BAMR’s mission-critical, stable cash-flowing, and inflation-resistant assets are likely to outperform BX’s greater emphasis on more economically-sensitive private equity and real estate (~$450 billion in assets under management).

This defensive posturing is further strengthened by the fact that BAM/BAMR derives a large percentage of its intrinsic value from its tens of billions of dollars’ worth of invested capital. In contrast, BX is virtually entirely an asset management pure-play business and derives a greater percentage of its overall earnings from performance incentive fees than BAM/BAMR does. While BAM/BAMR’s asset-heavier approach leads to inferior returns on equity during expansions, it generally weathers economic downturns better than BX’s asset-light approach.

As a result, while we expect both to suffer headwinds in an economic downturn, we expect BAM/BAMR to weather any major economic downturn better overall.

#3. Brookfield Has A Clearer Upside Catalyst

The final reason why we favor BAM/BAMR over BX at the moment is because it has a clearer catalyst for unlocking value and driving upside in the share price in the near term: Spinning off part of its asset management business. Effectively, what’s about to happen is that BAM/BAMR believes that its shares are being undervalued right now to the point where the true value of the asset management business is not being fully recognized by the market. The reason for this is because BAM employs a unique model in which it retains a much higher percentage of its earnings than its asset management peers like BX, and invests those retained earnings into acquiring stakes in the assets it manages. It especially likes to buy equity in its listed subsidiaries like Brookfield Infrastructure (BIP), Brookfield Renewable (BEP), Brookfield Business (BBU), and even recently took its real estate business (BPY) private. As a result, investors tend to undervalue its asset manager because capital that’s seeking exposure to asset managers generally favor the pure plays in the sector over a blended investment product like BAM/BAMR.

By spinning off 25% of the asset management business into its own individual entity, management hopes to unlock that value and earn a full and more proper appraisal from the market. As detailed in its latest earnings call:

As an update on the distribution listing of 25% of our asset management business, we are progressing well towards completing the distribution by the end of the year. As part of this and using this split as an opportunity to look to the future, our senior most team are focused on how we continue to move along our next generation of leaders. As you know, most of our senior partners remain at Brookfield to assist with business relationships and clients, but we believe in advancing younger executives as fast as we can.

The Company today known as Brookfield Asset Management will be renamed Brookfield Corporation, post the split. This is the Company that you currently own shares in and it will retain most of the proprietary capital owned by Brookfield, as well as continue to own 75% of the Manager. I will remain CEO and Nick Goodman will be appointed President and CFO. His focus in the future will be on capital allocation among our operating businesses and new business initiatives.

Brookfield Reinsurance will remain as a paired security to Brookfield Corporation, as it is today and holds our insurance business. Sachin Shah will remain CEO of the business. And we expect this business to become a significant operating business for Brookfield Corporation and Brookfield Reinsurance. And we are excited at what has already been done and for the growth to come. Sachin will expand on that in a moment.

Our Manager spinoff will be named Brookfield Asset Management Limited and will be the new entity for all of our asset management activities. You, as a shareholder, will receive new shares of this entity on the split. We refer to this entity in our materials as “the Manager”. With respect to the management and the Board of the Manager, Mark Carney will be appointed Chair of the Manager in addition to his other responsibilities at Brookfield. I will remain CEO of the business. Connor Teske will be appointed President of the Manager in addition to his responsibilities as CEO of our Renewable Power and Transition business, which for now will take up most of his time. Bahir Manios will be appointed CFO of the Manager and Anuj Ranjan will be appointed President of the Private Equity Group in addition to his overall business development responsibilities in the Manager. Brian Kingston, Cyrus Madon, and Sam Pollock, who many of you know, will remain CEOs of their respective businesses and each will become directors of the Manager with Mark, myself, and seven independent directors. Oaktree will continue to be run by Howard Marks and Bruce Karsh.

In contrast, BX is already a pure-play asset manager, so it has no such easy catalyst to drive upside in the near term.

Investor Takeaway

While both BX and BAM are terrific asset managers with long-term track records of generating market-crushing total returns for shareholders, we favor BAM at the moment. We believe that – between its cheaper valuation, more defensive positioning, and clearer upside catalyst – it offers investors with superior risk-reward at the moment. Overall, however, we believe both stocks offer attractive long-term total return potential and rate them both as Buys at the moment. We would consider adding BX to our portfolio below $85 and BAM below $45 per share. In the meantime, we’re deploying our own capital elsewhere in the alternative asset management space.