Brookfield Asset Management

Brookfield Asset Management (BAM) is well known among value investing circles. It is a leading global manager of real assets.

It is easy to get lost in BAM’s complicated structure. It is both: an asset manager, and an asset owner. It owns significant portions of publicly traded names (listed issuers like BPY, BIP, BEP, BBU), and private flagship funds that it manages like a traditional asset manager.

BAM eats its own cooking, and it is a good cook.

The funds and companies have provided superb returns in the past. As a part owner, some of these earnings and distributions flow to BAM. As an asset manager, it charges other investors and partners sharing the ride (fee bearing capital), and earns a performance-based carried interest (like a 2 and 20 hedge fund).

There is a lot of great commentary and information on BAM. Here is a small subset:

  • The Brooklyn Investor looked at BAM in June 2015 and did not seem particularly impressed by the value proposition
  • “Value by George” revisited it around that time, and had a more favorable take
  • There is a decent (and recent) stab at valuing BAM on SeekingAlpha by Eric Sprague
  • The 2017 Investor Day presentation provides a fine overview of the key drivers

Here are some important takeaways:

  • It is hard to argue that they have great management. BAM is a well run machine. The annual and quarterly (!) letters are a treat to read. The business is global and complicated, but the management seems quite transparent. They have strong culture, and a deep bench.
  • The business model is unique. As asset managers, they can leverage their investment gains on the assets they own by levering it with outside capital. They also earn a base fee on the outside AUM.
  • There are structural tailwinds, as allocations to real assets are increasing.
  • BAM is also a growth story. The AUM has grown 10%/year (2012 – $158B to 2017 – $258B)

Valuation

The 2017 investor presentation provides a glimpse at what the company might look like in 2022. They value the asset owner and asset manager parts separately, and add the two portions together.

I am unsure if one can come up with an estimate of intrinsic value without finding the intrinsic value of its holdings separately.

It is preferable to be simple and approximately right, than to chase down every moving part in this intricate operation.

In the presentation, they subtract the debt/corporate capitalization ($10B) from the total invested capital ($65B) for a $55B asset owner value.

For the asset management business, they slap a 20x multiple on fee related earnings ($1,689M * 20 = $33.8B) and a 10x multiple on carried interest (10 * $1, 054M = $10.5B). Adding them and dividing by the total number of units gives a value per share of $100.

I prefer to tone this number down.

For example, assuming ~3% dilution in the number of shares brings this number down to $80/share. Nevertheless, at today’s prices of ~$42, even the lower number implies a nearly 14% return.

What about just looking at the 2017 numbers? Using a similar methodology, the asset owner stake is worth $38.5B – $9B = $29.5B. The asset manager stake is worth $14.6B (FRE) and $6B (carried interest) for nearly $50B in intrinsic value. Dividing by the number of shares (1,065M), we get a per share value of approximately $47. Thus, even by this reckoning, shares are about 20% undervalued.

I took this opportunity to start a 1.5% position. I hope to add to the position, as I get more comfortable with it.

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