Brookfield Asset Management Ltd (NYSE:BAM) Goldman Sachs 2022 US Financial Services Conference December 7, 2022 1:40 PM ET
Company Participants
Bruce Flatt – Chief Executive Officer
Conference Call Participants
Unidentified Analyst
Thanks, everyone. We’re going to get moving with our next session. It’s my pleasure to introduce Bruce Flatt, CEO of Brookfield Asset Management. Brookfield is one of the largest global alternative asset managers with $400 billion generating AUM. The firm is uniquely aligned with several secular growth trends within private markets, including within real assets, global transition, private credit along with many others, despite what’s obviously been a pretty challenging environment for the markets — significant fundraising momentum, resulting in about 20% fee-related earnings growth over the last 12 months. So going to sustain sort of the growth markets that you talked about at the Investor Day a couple of months ago. So thank you for being here. Always great to have, and looking to part of this.
Bruce Flatt
Thanks.
Question-and-Answer Session
Q – Unidentified Analyst
So why don’t we start with a question on private marketing allocations and for the audience, this is probably going to be an old question since I ask it potentially in every one of these. But if you look at the new paradigm, the new kind of the regional change that we’re in today, higher with the fixed income yield that we really haven’t seen this global financial crisis. To what extent does that change institutional appetite for private assets?
Bruce Flatt
So first, I’d say we were not in favor three years ago and two years ago, nobody wanted to talk to us. And nobody was interested more or less in what we did, because we were in fact, we weren’t grow, we run many of the things that were out there. And if you fast-forward that to today, it’s very different. And a lot of the things that you said in your remarks, a lot of the things that we do are what people want to invest in.
So some of my comments are this way because of what we do and because of the global business we have. So if you’re a single industry private equity player that has a $2 billion funds, I don’t think you’re going to have the same comments from me.
What we do for people is on the low end, earn 8%, 9% and on the high end earn 20% or 25%. Take all of our products, we are in 8% to 25% on 50 different funds. And those I guess the short answer is those returns in a low-ish interest rate environment, which I’ll call right now are exceptional and they’re not — they’re needed in these institutional clients. And so I don’t think it slows. The first answer is.
And second, I think what people are finding out even more — and we’ve witnessed this for a long time, but the distractions of the public markets are terrible for people that have long-term wealth creation in mind. So if your sovereign plans, if they need money for liquidity, they should have it in fixed income and liquid markets and equity. If they don’t need it for liquidity, it should all be in private. Because the problem with the public markets is it distracts you from value.
There are two things. You all know this. There’s the value of an asset and there’s a price that it trades for. Sometimes it’s higher, sometimes it’s lower. Once in a while, it’s the same. But that price movement distracts from what really matters to wealth creation longer-term. And therefore, the short answer is any — these institutions for both return reasons and focus and distraction reasons, they continue to put more and more money into private and they will continue to — even though rates are higher today. And there’s a spread. What’s happened today is, is base rates are higher, but also spreads are much higher, right? That will come in. You can’t have –you’re not going to have both of that in the future. But there is an exceptional time for private credit or credit today just because of that environment.
Unidentified Analyst
Sure. No, we’ll just talking to that about that a little bit more. So when we think about fundraising for Brookfield, one of the things that I mentioned earlier, you guys have been very successful in fundraising of your flagship vehicles this year. As you look forward to 2023 and really even 2024 what fundraising opportunities are you most focused on outside of the flagship funds to in order to stay in this kind of 15% to 20% FRE growth target that you’ve outlined in past?
Bruce Flatt
Look our FRE growth targets are already locked in for 2023, 2024 or almost 2025. Like this business doesn’t happen overnight. It’s a very long tail business. The funds are raised over periods of time they’re deployed over three or four years. So you always have that out. So what we’re now focused on is what’s our let’s call it, a tale of three years from now, four years from now, five years now. It will certainly grow. It will grow at 15% to 20% — the asset management business will grow at 15% to 20% a year for the next five years. So what we’re focused on is year six to 10.
And the good thing is global institutions back to my comments earlier, they want core, core plus products in real assets. They want opportunistic products in infrastructure. There’s enormous amount of money still coming in. Despite all the “denominator effect” and all that, I just closed $21 billion for our latest infrastructure fund in six months fundraising, and we’ll do the balance of one this year. We did our transition fund, which is a — first time we did $15 billion. So that was done for six months last this year — early this year.
So I would say it’s — for the type of products that are different, we’re going to go with our opportunities — next Opportunities Fund strategy, the Oaktree strategy which I can’t think of a better time. It was 2020 when we raised the last fund at $16 billion. It was an excellent time, but this is going to be really, really good.
Unidentified Analyst
Got it. Yeah. Let’s talk about the transition business. It’s one of the things you just mentioned. Decarbonization is just one of the major secular themes out there and BAM’s investment pace here has been pretty robust. I think about half of the funds that you just raised has been already deployed or committed. What’s your outlook for the deployment of the trade here?
Bruce Flatt
Look, we got lucky — two of our biggest businesses are infrastructure and transition. And these are enormous businesses with trillions and trillions of dollars of capital has to go into digitization, de-globalization and de-carbonization. Those deals are really, really important to the world and it’s trillions of dollars. Specifically, on decarbonization, it’s really simple what we’re doing in our transition fund. We are taking money from clients, which not many people can do this. And we’re putting it in — we’re providing it to companies to help them get to lower carbon within their operations or their businesses.
Some of it’s really simple. All we’re doing is building wind and renewables, wind, solar and providing them power on a take-or-pay basis to de-carbonize our operations. That’s really simple. And after that, there’s a whole bunch of other things. And we’re the largest builder of renewables for Amazon today in many countries in the world, and we continue to do that. It’s a — it’s very profitable, and it’s a very large opportunity. So we put half the fund to work already. I think we’ll be able raising another fund next year, for sure, maybe this year and there’s a lot of opportunity in it and more money is needed.
Unidentified Analyst
Right.
Bruce Flatt
But the difference is this is hard that we’ve spent a long time building our renewables infrastructure businesses there. We run the backbone of the economy. These aren’t simple things.
Many countries, companies won’t take people as a counterparty, if you don’t have that. Like in the United States, you have to have work license to operate in power. We own Westinghouse Electric. We run half the nuclear plants in the world. So this is not everyone can’t do that.
Unidentified Analyst
Right.
Bruce Flatt
So it just gives you the moat that we have is just different from others. And therefore, we — look, the goal is of capital, raise money, put it to work and get a good return. How do you do that? You have to differentiate yourself and our differentiation is always been to try to continue to run the operation better. And it just gives us.
Unidentified Analyst
You’ve got some very deep moat in this business, as you pointed out. Obviously, that helps from a competitive advantage perspective. There’s a lot of newer players or other players coming into this space with a similar theme, right, like clean energy, decarbonization like is around the theme. But if I think about the evolution of this product over time, and almost think of that either as real estate or infrastructure, should we be thinking about sort of variation of a transition business into core-plus credit. Like is that a whole new ecosystem that you can build around?
Bruce Flatt
Yes. Like our infrastructure, just to go back to our infrastructure, the first fund we started was our, we call it opportunistic, but it’s opportunistic infrastructure. So we earn 15. I think our average for 15 years is 15%. So we promised 14. That was our first strategy, but now we have core-plus. We have a debt fund. We have secondaries.
And essentially, why that’s really important, and I’m going to guess the transition, but why that’s really important is when we go talk to a company, sometimes they don’t want to be taken over. So we can go how about door beat and we’ll provide you a minority interest into our core-plus funds, because they’re running it, and we’re just partner with them, a good partner and a helpful partner, but we’re just a minority partner or we can lend the money.
So it allows us to do a lot more things with the companies. In transition, it’s just this business is just at its infancy. And enormous amount of money are needed. And I think all of those things that I just mentioned will get built out by us and by others too. Obviously, there’s all — there’s — where there’s money, there’s old competition.
Unidentified Analyst
Yes. Yes.
Bruce Flatt
You know that from Goldman Sachs.
Unidentified Analyst
I’ve heard that somewhere. Long-term greedy, right? Infrastructure business. Let’s talk a little bit about that. I — again, lots of secular growth opportunities you guys are — have a really fantastic footprint in this part of the business. In terms of deployment, you’ve announced two very large deals this year. One is the $30 billion partnership with Intel for semiconductor facility in Arizona. And then there’s another one for €17 billion, I think, with Deutsche Telekom in Germany. So you have really sizable mandate. So help us think about are there more of those type deals we should be thinking about? How does that ultimately make its way through Brookfield Asset Management business? Like where in the P&L does that hit over what day and time?
Bruce Flatt
So, those are two of the Ds, digitization and de-globalization. And look, semiconductor chips are in medical products and many different things are coming back to the Western world. That takes — this is $30 billion. It’s one plant. This is — it would — won’t be 2% of chips in the world, $30 billion, one plant in Arizona.
So — and on the tower side, it’s Deutsche Telekom towers in Germany and Austria period. That’s it. So, these are big, big businesses. We bought 160,000 towers in India, very large amounts of money, and it’s not stopping. The investment by telecom companies in the 5G and therefore, they need data centers, they need towers. They need everything around that ecosystem. They can’t afford it on their balance sheet.
Intel is one of the best — on de-globalization, Intel and all of the other companies that make semiconductor chips. They — they’re weighted — A or plus rated company, but they just can’t build 10 plants at $30 billion. And therefore, they need money from outside, and that’s what we’re here for. So, I think there’s a lot of room with these trends for the infrastructure space and from the transition space.
Unidentified Analyst
Got it. Great. Let’s shift gears a little bit. I was hoping we could spend some time on real estate. It’s increasingly become a bigger source of debate in the market. Now, public REIT values are down as we all know, 25%-plus or so year-to-date with probably office and retail may be incrementally.
Now, this may be one of those you talked about earlier, there’s price and value and maybe that’s where one of those systems where there is a big disconnect. But what is your investment performance outlook for your real estate book? How is it holding up from a just a financial and fundamental perspective?
And I guess as cap rates continue to rise and economic growth potentially deteriorate, how do you think that portfolio will perform? And that goes for both the on balance sheet, I guess, BPG and BPY plus whatever is in the–
Bruce Flatt
All our funds. Look, I — we’ve been in the real estate business a long time. We’ve been through many cycles. We’ve been through a lot worse than this one, I can tell you. And the only thing I could say is if you own great rate real estate, which we happen to across the board, and you have it in great places, and you run it properly, it endures time and just don’t ever get in a situation where you have to sell. And we’re well financed across our whole book. We have great real estate. And what I can tell you is high-quality real estate, but with retail, office, industrial, all of the food groups, hotels today are in excellent shape.
Rent in Manhattan — since we’re in Manhattan, rents in Manhattan on premier quality real estate are 50% higher than pre-COVID, 50% higher than 2019. Now, if you have an obscure office building, not to denigrate Third Avenue, which is built in 1960 and has poor air systems, it’s no bid for leasing. So, there’s a huge disparity.
And that’s not like unlike always. But the fact is the story has always been the best building on the best corner and pay a little more. If you have to, and you’ll be fine. And remember, most real estate was financed with term financing, yes, so interest rate changes. And in fact, what’s happening today back to infrastructure every day, is investments with inflation and real estate, too. Rents are going higher partly because of inflation, you need to build a new office building renter, costs are much, much — I’m actually I’m quite positive, because I think, we’ll find great value in this market with some of the stress.
A lot of the stress in core product, and therefore, we probably won’t touch it, because it’s just not worth it. But there’s always what the times like this always bring about is, more opportunity to put money to work in opportunities. And I’m — I think in all of our businesses, in the next 18 months, we’re going to find some nominal thing to do, just because of the environment, and we have significant cash or capital available from our clients to be able to put the work. And I’m actually quite excited about it.
Unidentified Analyst
Is there anything you think is starting to bubble up on your screen as far as areas of stress within real estate that you are likely to participate in. So, clearly, not the lower quality stuff, but higher quality that you would view as kind of premier asset…
Bruce Flatt
No, not yet. Most real estate is in pretty good hands. Look, retail malls were shut down. There’s sales, if you have a good multiday, it’s 35% above 2019 sales, 35% above 2019. So like we had worked everyone went home, never went to an office building, remember, they were leased, so they’re still paying the rent, retail malls were shut down and hotels [indiscernible], you couldn’t have had anything worse about years ago. And the business survive and the cash flows are higher, and it’s growing.
And we should just remember, price and value, people for some weird reason today, the price is lower than the value, they’re unsure. So they price it here in the public market. It’s priced here, but it’s priced here today. Value is the discounted cash flow also was based on a stream of income. And I would say the markets are wrong generally, but you have to be selective because some it’s just bad real estate and you won’t do very well with it.
Unidentified Analyst
Yes. You mentioned deployment, this point on your last answer. So talk a little bit about that. I think as of the last quarter, you had about $39 billion of dry powder that will turn on fees upon deployment, that is going to drive $390 million or so in revenues. Lots of it is in credit. And I think you mentioned that this is going to be one of the best opportunities for Oaktree and their team. So talk just a little bit about what they’re doing, how fast do you think they’ll be able to put capital to work over the next, call it, 12 to 18 months?
Bruce Flatt
Yes. So we have two, I’ll call it two pools of credit money, balance sheet credit money, which is our insurance business, that’s $50 billion and all of the pool of money in our Oaktree franchise. And both of those are seeing — we’re seeing and we are putting money to work today in very significant amounts buying first lien paper, buying med paper, putting all of our credit money to work and with returns which are excellent. Will they get better at some point? Maybe, we’ve got lots of capital to go after this.
And one just has to invest, when you find some really good returns. But just take our insurance business, we bought a book — we bought three pools of insurance money 24 months ago on the assumption that interest rates would go up some time. They happen to go up quicker than we thought. And we’ve locked in 3% over here. And we put all of the assets we liquidated, all of the equities and all of the fixed income instruments beyond 18 months. So, we amount we’re now putting that into incredible fixed income opportunities.
And then, I think on the distress side, Oaktree is going to have an unbelievable next 24 months, putting money to work both in the fund they have today, but in the next fund that we raised. In addition to that, the direct origination credit business is evolving around the world. And I think there’s going to be a lot more opportunity for that in our Oaktree business.
Unidentified Analyst
Is that largely sponsor-based? Are you guys building it out a little broader?
Bruce Flatt
Both. Both.
Unidentified Analyst
Okay. You mentioned insurance. So why don’t we go there next. Clearly, the earnings run rate continues to surprise the upside. A lot of that, I think, is a function of interest rates, to your point, so I think kind of go from — $400 million to — quarters on an annual basis, the spreading from you guys generating on that book. How do you think that’s going to evolve from here? I know that is also the — you guys managing some of that money, which is not really part of the current run rate. So you kind of holding rates steady here on what’s kind of the build in earnings power of the book?
Bruce Flatt
Yeah. Look, it’s very — it’s very powerful right now. Because remember, what I said earlier, we bought a portfolio — most — somebody that give themselves in insurance business wouldn’t do that. We bought these books, liquidated everything, put it into cash, sat on no return for 1.5 years. Nobody does that.
Unidentified Analyst
Yeah.
Bruce Flatt
Unless, you’re an investor. So, our view is take as little risk as possible in insurance and earn our money doing what we do, which is invest. And right now, we’re taking a cash portfolio and putting it into things at 8%, 10%, 12%, 14% yields. And that’s very positive to that business, and it’s very positive for our earnings stream that comes through.
Unidentified Analyst
Let’s talk a little bit about retail, within a topic reserved for the last week or so. You guys have pretty meaningful ambitions to build that business out. You don’t have a whole lot of retail footprint today in some of those products, but the goal is to build. So thinking through the volatility, we’ve seen in the market, does that change your — your worthy opportunities that is here for Brookfield?
Bruce Flatt
So when you asked me a year ago, I was trying to say, we had more than we actually have, because everyone was talking about retail. And now, we don’t have very much. So, I can be — I can be pleased about that.
Unidentified Analyst
Yes. That’s falls off within.
Bruce Flatt
Yeah. Exactly. Look, here’s what I would say. Our business is in 30 countries in the world, who raised funds from 2,000 institutional investors around the world. We have an insurance book and an insurance business with a large and growing number of insurance companies and helping them do the same things that we do.
We have many different channels of retail in our listed vehicle. And we started into dappling into retail. And I guess our goal of all of these distribution channels is to build them methodically with the right products when it makes sense and be disciplined about it. And you just haven’t got there yet. And we’re still learning, and we’re still in the instance, we’ve hired a lot of people. We’re spending a lot of money on it, and we will get there one day. But I think what’s going to happen now is that, all of these products will evolve and people will learn from the things and we always do. And I guess I was — until we learn everything, we’d like to just do slowly and methodical.
Unidentified Analyst
Yeah. That’s helpful. All right. Let’s shift gears a little bit. Maybe we can talk about some of the recent news flow for the firm with one of the big announcements, which by the way, you hinted to that, I think, at our conference here last year, about the spin-off of the Asset Management business as a way to unlock value. You’re in the middle of that. I think both BAM, the Asset Manager and BAM Trading when issued market opposed to close, I guess, in the next couple of days here. So once this transaction closes, what are the incremental opportunities do you see for stand-alone Brookfield Asset Manager that could present themselves that maybe warning you guys as part of the bigger conglomerate?
Bruce Flatt
So just for everyone benefit, if they don’t know this. Brookfield, today, the listed vehicle will be called Brookfield Corporation, and we’re dropping the Asset Manager down, and we’re distributing basically a stock split. We’re distributing 25% of the shares of the manager to our owners, so the shareholders. And we’ve done this seven times before, spun things out to our shareholders, because we believe the owners own the business, why do an IPO, give it to our owners.
This one, we’re actually really, I’m always excited about them, after — on November 7 [ph], but this one’s bigger. It’s a very large business. It generates $2 billion of cash flow, grows at 15% to 20%. It has no debt. We’ll pay out 90% of it. We’re going to own 75% of it afterwards in the parent company in Brookfield Corporation.
And it really does two things for us. For those that want to be in a great manager, you can now buy that security on its own and not take the risks or rewards, which again being in this other entity. And in this other entity, it now freezes up to not have to explain to people, no, no, no, we’re a manager. And we’re not a manager, we’re asset heavy. This one’s asset light, asset light be fair.
If you want to be with us in asset heavy, 18 months ago or 30 months ago, we weren’t in the insurance business. Today, we’re in insurance business, and it’s going to become very large 10 years from today. So we changed the complexion of that business. And we’ve changed the complexion of that business five times over 30 years.
This one will be an asset management business, and it’s going to be an asset management business for a long time, so to get to the answer for you to believe it. But this asset management business we’ll now be able to have a group of people totally focused on asset management that will have a security in the marketplace extensive properly with it, without all of you along over here.
And we may be able to use it to do things to grow the business in May, don’t know, but May. It opens options A, reach properly and B, if the opportunities come along that we think are as good as what we have. And B, because it has some cash, but probably not. It would have to issue with security to be able to do it. It would have to be better than what we have today.
In the Corporation, it opens up a whole bunch of things. we often get opportunities to come along that are far bigger than our funds that we’ve been loath to do them in the corporation and confuse people, but now that’s what this entity is going to do. And it’s going to fund all of the businesses we have a manager that’s going to support all the funds. It’s going to support the manager; it’s going to do all the things it’s done before. We get the benefits of everything because we own 75% of it. But what it’s going to do is it’s going to possibly take on other businesses, insurance being one, but use the insurance float and all of the other capital that we have to be a home for businesses which are larger than what would ever fit in the fund.
Unidentified Analyst
Yeah. So I guess to just follow-up on that point. When it comes to the manager strategy seems pretty simple. And if awards you guys would ultimately stand-alone currency a higher multiple, maybe there are some deals you guys could do that will enhance the franchise down the road, et cetera. When it comes to the corporation, is there a capital return angle to that at all, if the stock trades at a meaningful discount to what the intrinsic value is, because again, you will actually be able to see a lot of intrinsic value, because a lot of it is going to be the public market, the other piece that’s not as really insurance and real estate?
Bruce Flatt
Yeah. Look, it’s just capital allocation. And if it trades cheap, we’re going to have lots of capital, and we bought stock back. So it offers — we’ll have the opportunity to do that. And we’ll have — but look, we’re in the business of making money for our owners. And now that vehicle up there, we’ll have lots of freedom to do what it wants. And by — including buying stock back, if it trades cheaper.
Unidentified Analyst
Yeah. Perfect. Okay. We have a couple of minutes left on the clock. So if anybody in the room has a question from Bruce, let us know. Yeah.
Unidentified Analyst
Hi. Thanks for the time Bruce. Really love what you’re doing with the spend. I feel like it definitely isolates the asset manager and kind of helps really kind of give a better valuation to that. But I guess to follow to Alex’s point, like if you look at the issued market, it’s basically implying that EPG is valued at like 75% of what you guys have it at. So how aggressive could you actually be on the repurchases, basically kind of address that question between the value and the price dynamics such that it doesn’t create a permanent valuation footprint in the marketplace? Thank you.
Bruce Flatt
So look, I don’t know — I actually haven’t looked at the issue marked. And I doubt it’s reflective of what most people think the securities are worth. I’d say in the next, as things settle out over the next six — three, six months, I think we’ll be able to tell where what people think of that security. Until then, I don’t know. But the bottom-line is we’re highly incented as management and as owners of the business, just like all shareholders are to ensure that our securities at least traded a fair representation. And if not, it’s the greatest opportunity we can do because we know the businesses. So unlike many management of some companies that don’t understand the arithmetic of what’s in the company, we price our assets every single day. And so if it trades for a period of time at a big discount, we’ll obviously keep buying back stock.
Unidentified Analyst
Great. Well, I think we’re going to be it there. Bruce, thank you very much. Great to see you.
Bruce Flatt
Thank you all.
Unidentified Analyst
Pleasure to have you.
Be the first to comment