Brookfield Asset Management shifting investment focus to publicly traded debt, stocks as markets tumble

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Brookfield Asset Management Inc. chief executive officer Bruce Flatt says his company is moving away from private assets and buying publicly traded debt and stocks – including its own – in the recent market carnage.

“We have switched our focus for investments to the listed stock markets. ... There are some stocks and debt starting to trade at a large discount to intrinsic value and we are focused on these,” Mr. Flatt said in a shareholder letter released Monday.

It’s a massive shift for a company that manages more than US$500-billion in assets, largely by buying multibillion-dollar companies, real estate properties or infrastructure assets. Until the current crisis, Mr. Flatt had been sounding the clarion call that these “alternative assets” were in such demand for their long-term outperformance, they would eventually trump the public stock markets as the top option for pension funds and other huge money managers.

In the past month of rapidly falling asset prices, however, the market for big private deals has frozen. Private-equity investors such as Brookfield borrow money to make long-term investments. Rock-bottom interest rates are great news for them – unless the companies they buy crumble in an economic crisis and can’t generate the profits needed to pay the debt.

That concern may explain why shares in Brookfield and its publicly traded affiliates have been hit harder than the average stock in the S&P/TSX 60 index of large companies. Since the Canadian markets peaked on Feb. 20, Brookfield and its Brookfield Infrastructure Partners LP, a fund focused on bridges, roads, and technology assets, are down about 40 per cent. Brookfield Property Partners LP, focused on commercial real estate, is down about 55 per cent.

“Our shares have sold off along with everything else. We have been acquiring, and will continue to acquire our own shares for value when it makes sense – and in time, we are certain they will recover,” he wrote. (He did not quantify the extent of Brookfield’s current share buybacks.)

Mr. Flatt’s letter seems an attempt to assuage his shareholders’ concerns and paint Brookfield as at least a survivor, and perhaps a victor, of the economic crisis. He said “We are also starting to receive calls from companies in need of capital, and we look forward to being helpful to companies in need, where we can." Brookfield’s latest funds, totaling over US$50-billion, are only 40 per cent invested, “so we have a lot of capital to put to work in this environment.”

In a disclosure last week, Brookfield said it spent $6.7-million to buy an additional 1.172 million shares in Calgary-based power generator TransAlta Corp., taking its ownership of the company to 10.1 per cent.

Mr. Flatt also argued for the strength of the company’s balance sheet. He said Brookfield and its four publicly traded partnerships – which also include Brookfield Business Partners LP and Brookfield Renewable Partners LP – have about US$12-billion of lines of credit with banks, “virtually undrawn.” The Brookfield entities have US$5-billion “of financial and non-core assets that can be liquidated with relative ease (even in today’s markets) should we so choose.” Corporate debt totaled US$7-billion, versus a market cap of under US$40-billion in Monday’s trading.

“For us, compared to the direct hit we took on 9/11, this uncertainty and volatility feels manageable,” he wrote. "In 2008, with the banking system failing, real asset owners didn’t know if many lenders were going to exist in the future. Today, the banking system is in far better shape. It never feels very good to have this degree of chaos, but this will pass."

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