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Real. Hard. Assets.
I can’t hold software in my hands, I can’t eat a search engine.
There are always abstract elements that require you to connect dots while determining value in these goods.
Real assets, on the other hand, are much more concrete, much more free cash flow generative, things I can touch and feel.
These real assets are things like roads, highways, ports, rails. Stuff your grandad tells you about between long drags on a Gandalf-like pipe, before he claims he walked to school uphill both ways.
These assets react incredibly well in an inflationary environment as they hold value with rising prices.
In Canada, we have one of the best operating teams in the Biz… Brookfield Asset Management (BAM).
They have a whole bunch of different corporate structures, a parent company, and look more like a private equity company than any normal stock you’ll see on a wall street bets board.
In tonight’s newsletter, we get down to why Boring can be Beautiful !
This week, in <5 minutes, we’ll get in to the house of BAM:
A Brief History 👉 How it all began
Different Arms of the Biz 👉 Asset Management (BAM), Properties (Privatized), Infrastructure (BIP), Business Partners (BBU), Renewables (BEP)
The SO WHAT?! 👉 Would you like Compounded returns with that? Real Assets vs Inflation.
How GRIT’s Playing it 👉 Longtime BAM holder
Let’s get started!
1. A Brief History 👉 How it all began
Early History
Brookfield has quite a storied history, with the earliest form of the company dating all the way back to 1899. What is now Brookfield began as São Paulo Tramway, Light and Power Company which operated in the construction and management of electricity and transport infrastructure in Brazil.
In 1912, Brazilian Traction, Light and Power Company was incorporated in Toronto as a public company to develop hydroelectric power operations and other utility services in Brazil, becoming a holding company.
In 1916, Great Lakes Power Company was incorporated to provide hydro-electric power in Sault Ste. Marie and the Algoma District in Ontario.
Fast forward to 1969, where the combined entities were renamed Brascan Limited. Brascan was a combination of "Brasil" and "Canada".
In 1979, brothers Edward and Peter Bronfman bought Brascan Ltd., and hired a Jack Cockwell to manage their money. Jack was the financial whiz behind the deals. He used cash flow from Brazil to diversify into real estate, resources, beer and financial services.
Brascan became this intricate, secretive web of cross-ownership. At its peak, the enterprise controlled over 200 companies, had 100,000 employees, and $120 billion in assets. At one time, Brascan represented one-third of the stock market capitalization of the TSX.
The '90s recession came and Brascan got into trouble. It had to sell many assets to pay down debt. It was a long and winding story from there, but we’ll skip this part for now and fast forward to the changing of the guard…Bruce Flatt succeeding Jack Cockwell as CEO.
Recent Transformations
In 2002, Bruce Flatt succeeded Jack Cockwell as CEO. Flatt represented the future for Brascan/Brookfield. He got rid of cyclical resources (the worse capital compounders) like forest products and focused on power generation and real estate.
Flatt felt it would draw in more institutional investors growing portfolios for the wave of retirees on the horizon and got into asset management. As the company was forging a new identity, the company was renamed Brookfield Asset Management in 2005, after 37 years of Brascan.
Flatt is responsible for turning a complicated organizational structure into a premier alternative asset manager.
By 2018, Brookfield's major public subsidiaries included Brookfield Infrastructure Partners, Brookfield Renewable Partners, Brookfield Property Partners, and Brookfield Business Partners.
A quick-shot of only recent deals:
August 2018: Brookfield purchased Westinghouse Electric Company, a manufacturer of large nuclear reactors, out of bankruptcy for $4.6 billion.
March 2019: Brookfield Asset Management announced that it had agreed to buy most of Oaktree Capital Management for about $4.7 billion, creating one of the world's largest alternative money managers.
July 2019: The sale of Vodafone New Zealand Limited to a consortium comprising Infratil Limited and Brookfield Asset Management Inc. was settled.
October 2019: Brookfield bought The Leela Palaces, Hotels and Resorts, an Indian luxury hotel chain located in New Delhi, Bengaluru, Chennai, Udaipur, in a US$530 million settlement, marking the entry of Brookfield in India’s hospitality market.
By the numbers today…
Under the Radar
TRACK RECORD OF EXCELLENCE. Greenbriar Capital is a leading developer of entry-level housing, renewable energy, green technology, and sustainable investment projects. Since 2013, the team has built and financed +$180B of renewable energy projects, including 50,000 MW of solar! Their current projects, including a housing development in California and a solar farm in Alberta, are even more exciting*!
SAFETY FIRST. BIGG Digital is on a mission to bring security & accountability to cryptocurrency with its trusted data-analysis and risk-scoring capabilities for blockchain/Bitcoin and other cryptocurrencies. How does it do this? Netcoins is the safest & fastest way to trade crypto, and Blockchain Intelligence Group is setting the standard in crypto forensics*!
LEADING FOOD INNOVATION. MeliBio, a CULT Food Science portfolio company, just received the JUST Food Magazine Excellence Award in the Innovation category! Previously, it was featured in TIME’s 2021 edition of “Top 100 Inventions of The Year”. And they’re not done yet: the bee-free honey-producing trailblazer is expanding production and hiring top scientists to develop delicious new flavors*!
OWN THE CUSTOMER. Rivalry is already growing at break-neck speeds and with $41M cashed up they’re positioned for more aggressive growth (Australia in Q1 and Ontario in H1). How are they doing it? Rivalry is deeply woven into the fabric of Internet culture, which means they own their customers, rather than renting them with outsized spending*.
TRANSFORMING HEALTHCARE. CloudMD’s has built a full, healthcare ecosystem that addresses all points to an individual’s care, and they’re targeting employer healthcare. The connected platform already has over 560,000 individuals onboarded, and has some major Corporations like Sun Life using it to manage the health and wellness of their employees. CloudMD is revolutionizing the delivery of healthcare and most recently acquired MindBeacon, a leading iCBT mental health provider. Their platform delivers proven, improved health outcomes including: 70% symptom improvement in depression and 98% satisfaction rate*!
THE AMAZON MARKETPLACE OF SUSTAINABLE PRODUCTS. With 15% of greenhouse gas emissions coming from livestock, and a fossil fuel input for animal protein 10x that of plant-based alternatives, it’s time for a more sustainable way. Enter Vejii, the digital powerhouse building a marketplace home to thousands of plant-based and sustainable-living products from hundreds of vendors*!
*This is sponsored advertising content.
2. Different Arms of the Biz 👉 Asset Management (BAM), Properties (Privatized), Infrastructure (BIP), Business Partners (BBU), Renewables (BEP)
Brookfield Asset Management
Think of BAM as the ownership group that is a fee collector on all the underlying entities that also gets a lift through capital appreciation and distributions from its invested capital.
Directly under BAM’s asset management activities are $341B of fee-bearing capital (plus $35B in commited capital) across a broad portfolio of real estate, infrastructure, renewable power and transition, private equity and credit.
The investments can be split into 3 major categories:
1. Long-term Private Funds ($151B): These funds are longer in nature and include closed-end value-add, credit and oppotunistic strategies. Revenue is generated here from base management fees plus carried interest.
2. Perpetual Strategies ($113B): Perpetual capital is managed in BAM’s affiliates (BEP, BIP,BBU) as well as core and core plus private funds. Revenue generated here are management fees, incentive distrubution fees, and performance fees.
3. Liquid Strategies ($77B): In this section of the portfolio are publicly listed funds and separately managed accounts focused on fixed income and equity securities across real estate, infrastructure, and natural resources. Revenues here are fee and performance related.
Amongst these three broad-based categories are the following operating categories:
1. Asset management: includes managing long-term private funds, perpetual strategies and liquid strategies on behalf of investors and the company, as well as their share of the asset management activities of Oaktree. They generate contractual base management fees for these activities as well as incentive distributions and performance income, including performance fees, transaction fees and carried interest.
2. Real estate: includes the ownership, operation and development of core and transitional and development investments, as well as their share of LP investments, which sit within our private funds.
3. Renewable power and transition: Includes the ownership, operation and development of hydroelectric, wind, solar and energy transition power generating facilities.
4. Infrastructure: includes the ownership, operation and development of utilities, transport, midstream, data and sustainable resource assets.
5. Private equity: includes a broad range of industries, and are mostly focused on business services, infrastructure services and industrials.
6. Residential development: consists of homebuilding, condominium development and land development.
7. Corporate activities: includes the investment of cash and financial assets, as well as the management of corporate leverage, including corporate borrowings and preferred equity, which fund a portion of the capital invested in other operations.
Brookfield Properties (Acquired): BPY
Brookfield properties used to trade under the ticker BPY before getting privatized by BAM in July of 2021.
Prior to privatization, Property partners had $88B in assets including office, retail, multifamily, logistics, hospitality, triple net lease, manufactured housing and student housing.
BPY owned properties like London’s Canary Wharf and Brookfield Place in New York. Back in 2018, BPY also acquired GCP Inc., which is the second-largest mall operator in the US for about $15B.
Going into the offer, BAM already owned about 60% of BPY, which had a market value of around $14B, a significant discount to the value of its underlying assets.
We all know how hard COVID hit offices and malls, so time will tell if BAM snatched this up for an overly discounted price, or if this capital allocation strategy of bringing BPY inhouse will backfire.
Brookfield Renewables (BEP)
You can’t open a single macro pitchdeck without hearing about some sort of ESG emphasis. Mark Carney (ex govenor of the Bank of England) was tapped by Brookfield to lead their ESG efforts. He unfortunately made a green-washing comment by claiming a large portfolio was carbon neutral which talking heads jumped all over.
But through all the hoopla – renewables is one of the very exciting growth engines in the Brookfield family.
Their current portfolio consists of approximately 20,500 MW of installed capacity with an addition development pipeline of 36,000 MW. They focus on Hydro, Wind, Solar, and Energy transition, with their breakdown of revenue by type and region as follows:
The focus within this entity is exactly what brookfield is known best for: capital allocation. If we look at the unit economics of renewable energy, it now is much more cost effective to look at solar on a levellized cost of energy basis vs. traditional fossil fuels.
The company had quite a gangbuster year in 2020 as alot of growth assets were bid up in the period of unprecedented monetary expansion, but the price has now come back to earth.
Brookfield Infrastructure Partners (BIP)
BIP owns and operates utilities, transport, midstream and data businesses in North and South America, Europe and the Asia Pacific region.
This segment is a stable cash flow machine. Around 90% of the Adjusted EBITDA is supported by either regulated or contracted long-tail revenues (which I’ll get into below why this is important). If we break down their operating segments, we get the following:
Looking at a 5 year chart, we have the Covid sell-off met with a rapid recover, but then a steady slow grind up and to the right in a market that has been challenging for anything with a higher multiple:
Brookfield Business Partners (BBU)
You can think of this side of the business as the private equity arm of brookfield. This is the gunslinging M&A environment that is an MBA’s wet dream. Its all about owning and operating high quality businesses that are low cost producers or benefit from high barriers to entry. Some classic Porter’s 5 forces stuff.
They have the following operating segments:
Alot of this segment has a “Warren Buffet of Canada” kind of vibes, as you go through the filings they talk about operational efficiencies and buying companies using a value-first framework. One of their key holdings is also a residential mortgage insurer, which sounds simliar to Buffet’s tactic of building his empire on the free cash flow generation of GEICO.
If we look at the chart, the recovery looks like it took a while longer for this equity vs. the other industries, as it looks like their portfolio was more exposed to pandemic-exposed businesses.
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. The SO WHAT?! 👉 Would you like Compounded returns with that? Real Assets vs Inflation
Compound Returns
If you need to know only one thing about Brookfield, its this chart.
Since Bruce Flatt took over in 2002, the company has compounded total return (which includes reinvesting dividends – orange line) at 18% on an annualized basis. The S&P500 over the same time period? 9%. Ok, but how about the NASDAQ which has been on an absolute tear? 13%. Flatt beat both, by a very healthy, very compoundable amount.
Brookfield is one of the best steady compounders of capital over the last two decades. The main reason they are able to contually generate stellar returns are their economies of scale in access to cheap financing (both debt – low cost of borrowing, and equity – buying BPY at steep discount to NAV), their best-in-class capital allocation to target projects with IRRs in the 12-15% range, and the stability of the cash flows in the underlying businesses.
Yes, Brookfield is still subject to businesses cycles, but the diversification of their asset base in economic shock resistant industries alongside high growth components are a wonderful balance of value and growth.
Real Assets as a Hedge Against Inflation
We’ve wrote at length about how the CPI readings are the highest they have been in 40 years, so we all know that inflation is here, but what can we do about it?
Any time you want to hedge against inflation, real assets are always in the discussion. Inflationary periods typically arrive during periods of economic growth, in which real assets rise in tandem with inflation. Inflation sensitivty of the underlying asset is driven by the pricing power that it has, and real assets typically have the ability to increase prices.
Examples of this include contracts or regulations that allow commercial real estate landlords to raise rents and operators of infrastructure assets like utilities and toll roads to pass along higher costs to their customers.
When it comes to the rate discussion, Brookfield added these bullets in respect to rates:
4. How GRIT’s Playing it 👉 Longtime BAM holder
I have been a longtime shareholder of BAM because of their incredible capital allocation track record, the flexibility of their corporate structure to pursue the lowest cost financing, and because I simply want to invest in the most diversified entity of the business.
By purchasing BAM, you participate in the fee generation from all different components, capture upside on capital appreciation, and participate in one of the best compounders available in the stock market today.
You always want to bet on the right horse, and Bruce Flatt is a certified stallion.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else we Grittin’ On?
PAY DAY. Investment banking executives are getting their biggest payout in decades. It's raining bonuses on Wall Street
SPENDING SHIFT. Consumers have pivoted spending from physical goods to services like dining & travel. The pandemic-induced trend of goods over services appears to be reversing.
PFOF IS BOOMING. Earnings from telling customer order flow to electronic trading firms surge 33% in 2021. Not even this could save Robinhood.
OPEC+ BOOST. With oil prices topping $90 a barrel, OPEC members and its allies have agreed to pump more liquid gold to help alleviate supply concerns. They will collectively raise production by another 400k barrels a day in March.
IPO FATIGUE. Global deal volume is down by 60% vs the same period last year. And an increasing number of deals are being pulled amid volatile market conditions.
Sources:
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