Canadian alternative asset manager Brookfield Asset Management (BAM) reported its Q1 2023 results Wednesday morning. Despite a strong showing, its shares are down more than 4% in afternoon trading.
At a time of great uncertainty in the markets and the general economy, Brookfield is confident it can grow its business significantly over the next five years. The company aims to double fee-bearing assets to at least $1 trillion.
One of the ways, but not the only way, it plans to reach $1 trillion is through the credit market. So if you’re interested in owning a well-run business, Brookfield is worth owning for the long haul.
Here’s why.
A Rundown of Brookfield’s Latest Earnings
Before getting into the bread and butter of Brookfield’s quarterly earnings report, it's important to note that 75% of Brookfield Asset Management is owned by Brookfield Corp. (BN). In December, the former Brookfield Asset Management changed its name to Brookfield Corporation, then spun off 25% of the company to public investors.
This is a common practice within the Brookfield ecosystem. Over the years, it's spun off pieces of its various businesses, including infrastructure, private equity, and real estate.
In the case of the asset management business, it wanted to separate the actual management advisory and fee-generating firm into an asset-light business model, where investors could value it more easily. Hence, the spinoff.
Shareholders of Brookfield Corp. (the old BAM) got 0.25 shares in the new BAM and one share of BN for every share held in the old BAM. As a result, the new BAM will pay out approximately 90% of its distributable earnings, providing investors with a current dividend yield of slightly more than 4%. Brookfield Corp. yields less than 1% by comparison.
So, if you’re an income or dividend investor, at the very least, BAM should be on your watchlist. Now back to the task at hand.
There are five key numbers from BAM’s Q1 2023 results. Remember that all information is presented on a 100% basis without considering the 25%/75% split in ownership.
1. Its distributable earnings in the first quarter were $563 million, 14.7% higher than a year earlier. Fee-related earnings accounted for 97% of the distributable earnings. For the 12 months ended March 31, they were $2.17 billion, up 10.5% from a year ago.
2. The firm raised nearly $100 billion in capital from investors over the past 12 months ended March 31, with $19 billion raised in 2023.
3. It finished the first quarter with $37 billion of uncalled fund commitments, not earning fees. However, once deployed, they will generate approximately $370 million annually.
4. It invested $17 billion of capital in the first quarter. Investments included Origin Energy (OGFGY), European data center owner Data4, and intermodal container owner Triton International (TRTN).
5. Lastly, related to its credit push, it increased ownership of Oaktree Capital Management to 68% from 64%. Acquired in September 2019, Oaktree is run by legendary investor Howard Marks and specializes in distressed credit.
It’s Expanding Its Private Credit Business
Brookfield CEO Bruce Flatt and the rest of its management team have always been good at finding ways to build its fee-bearing assets. So it goes where others won’t. Right now, that’s the credit market.
“Our credit business is among the largest globally, with approximately $140 billion of fee-bearing capital across a diverse set of strategies. We offer private credit funds across all our verticals of real estate, infrastructure, renewable power, private equity, and corporate lending,” Flatt stated in its Q1 2023 shareholder letter.
“With the significant market tailwinds for credit, we believe we are still in the early innings for many of these product offerings, with significant room for growth.”
Brookfield understands the current playing field. Higher interest rates make leveraged buyouts less attractive, not to mention riskier. Meanwhile, the banking troubles in the U.S. means the traditional venues for companies to turn to for financing are drying up. That’s especially true for private equity firms.
“One area of particular focus recently has been direct lending, an asset class that has expanded significantly and now represents a global market of approximately $1.5 trillion.”
“... The direct lending market has become increasingly attractive recently due to the limited availability of debt capital to finance private equity-sponsored transactions combined with the record-high levels of committed private equity capital raised for deals.”
It plans to originate senior secured loans for a minimum of $500 million per U.S. private equity-owned company. It represents a significant piece of Brookfield’s private credit strategy. In addition, it is currently raising capital for its Special Investments Credit Strategy and Consumer and SME Credit Funds, as well as for its Infrastructure Debt Fund and Real Estate Debt Fund.
It’s going to be busy over the next five years.
The Bottom Line
Besides dedicating much time in the shareholder letter to private credit investing, Flatt discussed the future of alternative asset management. He believes that the industry will experience significant consolidation in the future.
As one of the world’s leading players in the alternative asset management industry, Flatt sees Brookfield taking a significant role in the industry's future evolution. While he didn’t come right out and say it would be looking to grow through acquisition, the writing is on the wall.
“Our $825 billion of total assets under management, our ability to raise $75 to $100 billion annually for investing, and our ability to offer compelling co-underwrite and co-invest opportunities at scale, makes us one of these major players,” Flatt wrote.
“We feel exceptionally privileged to be in this category and work hard every day for our clients and partners to ensure we stay there.”
I don’t think there’s any doubt it will remain a global leader in alternative asset management.
For all you options junkies out there, I particularly like the idea of selling Oct. 20 $40 puts for income and selling Oct. 20 $30 puts for getting BAM at a reasonable price.
Whether you bet on Brookfield Asset Management through BAM or BN is your call. But do make the call. Then, in five years, you will be happy you did.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
