Brookfield Asset Management BAM.A-T is mulling whether to carve out its asset management business into a separate company, a move that could create a new enterprise worth as much as US$100-billion.
Chief executive officer Bruce Flatt floated the idea at the end of his quarterly letter to shareholders, saying any corporate change could come “in the quarters/years ahead” – or not happen at all.
Still, on an investor conference call Thursday morning, Mr. Flatt said, “We’re heading down a path and we’re quite serious about it, or we wouldn’t have put it in the letter the way we did.”
Investors reacted well. At highs in Thursday trading, Brookfield shares were up nearly 10 per cent from Wednesday’s close. The shares finished up 5.5 per cent on the Toronto Stock Exchange, at $76.00, and 5 per cent higher on the New York Stock Exchange, at US$59.72. They hit a 52-week high during the trading session on both exchanges.
Any move to hive off asset management would simplify a complicated colossus. Brookfield has billions of its own money invested in giant portfolios of what it calls “alternative assets” – real estate, infrastructure, energy and distressed debt. Brookfield also attracts outside money, from institutional investors and the wealthy, to invest alongside it.
The assets it buys are placed in partnerships, some of which trade on U.S. and Canadian exchanges, and other private funds.
The proposed split would pull the business of selecting investments into a separate “asset-light” company that would collect management fees as revenue. Brookfield’s own US$50-billion in investment capital would stay behind in an “asset-heavy” main Brookfield.
In the letter, Mr. Flatt said Brookfield’s asset management business “is now one of the largest and fastest-growing scale alternative investment businesses globally.”
“Separating a part of our manager in the public or private market, while ensuring it still benefits from the capital we have at overall Brookfield, could open up growth options to us that do not exist today,” Mr. Flatt wrote. And as Brookfield’s insurance business grows, separating a part of the asset manager “might make sense in order to allow investors who only want exposure to the manager, to own a separate security.”
Mr. Flatt said on the investor call that Brookfield prefers to have the main company own a meaningful stake in the spun-off business. “Our view today is that having the capital company have an interest in the [asset] manager to be able to align itself and have its capital managed in a fashion that it’s happy about is the right way to go,” he said. “But if [shareholders] of ours have [other] views, we’d be pleased to talk about it.”
He also suggested the new asset management enterprise could pay a hefty dividend. “There will not be a lot of need for cash in the company. So it could have a full payout of its cash flows if we so choose.”
Mr. Flatt said based on comparable multiples of pure-play, asset-light alternative investment managers, the equity value of Brookfield’s separated asset management business would likely be in the range of US$70-billion to US$100-billion, or about US$45 to US$60 a share. The US$50-billion in equity capital that would remain at the main Brookfield would be worth about US$30 a share, he estimated.
Mr. Flatt’s assessment gives more value to Brookfield than shareholders currently do.
Brookfield shares on the NYSE generated a 48-per-cent return in 2021, and Mr. Flatt said US$1-million invested 30 years ago in the shares is worth US$111-million today. “Please always remember that compounding reasonable returns over long periods of time is an incredible miracle of finance,” he wrote.
Brookfield had inflows of US$27-billion during the fourth quarter of 2021 and US$71-billion for all of 2021. Fee-bearing capital – the amount of outside investment – now totals US$364-billion, an increase of about US$53-billion compared with the prior year.
Analysts have suggested investors are discounting Brookfield stock because of its current structure.
“We’ve talked about BAM’s higher balance sheet capital perhaps driving a bit of the discount to some peers (i.e. market preference for “capital-light” models),” Bank of Nova Scotia analyst Mario Saric wrote in his Brookfield earnings preview earlier this week.
Prior to Thursday’s jump, Brookfield shares traded at 22 per cent less than Mr. Saric’s estimates of their future value, with a discount to Brookfield’s asset management business playing a role in the undervaluation.
In an analysis, John Foley, U.S. editor of Reuters Breakingviews, pointed out that applying the multiples from a sum-of-the-parts valuation of private equity company Blackstone to Brookfield would yield a value of nearly US$130-billion – about a third more than its current value.
Mr. Flatt’s letter was published alongside Brookfield’s fourth-quarter and full-year results Thursday.
Net income nearly doubled in the quarter, to US$3.46-billion from US$1.82-billion in the prior year. The figure was aided by nearly US$2-billion in increases in Brookfield management’s estimate of the fair value of its assets.
Distributable earnings, a measure Brookfield uses as a proxy for cash earnings that could be paid out to shareholders, were US$1.3-billion versus US$1.63-billion in the final quarter of 2020. (The total includes, among other things, fees from investors, distributions and dividends from investments, and realized gains from sales of assets.)
Full-year net income of US$12.39-billion was up from 2020′s US$707-million, a number flattened by decreases in fair-value estimates that year. Full-year distributable earnings were US$6.28-billion, up from US$4.22-billion in 2020.
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David Milstead