BAM! Brookfield Asset Management's Focus on First Principles

It is often more valuable and wise to focus on being a picks and shovels supplier rather than a gold miner

As investors, it is often more valuable and wise to focus on being a picks and shovels supplier rather than a gold miner. Infrastructure businesses are inherently positioned to play such a role. Over the past ~2 years AI has become a dominant topic in just about any conversation from technology to academics. More development in this area and the greater data space means a high need for technological resources like data centers, fiber, and energy resources.

Investment Thesis:

Brookfield Asset Management (BAM) is positioned as a key player in the growth of AI and other technologies without being affected by who ‘wins’ the space short or long term. The company has also organized itself to be agile and dominant in building into attractive areas. For example, over the last year building a significant presence in credit and planning on continuing to pursue many attractive opportunities in the sector. BAM also prospers from the tailwinds of being a key part of the Brookfield ecosystem. This eases the fundraising process and allows for more and higher quality investment options. The company has shown strong performance, shareholder-based values, and trades at a relative discount to the long-term value it is on course to create.

Company Overview:

The Brookfield ecosystem is no stranger to restructuring, both spinning off business units and reacquiring them. Brookfield Asset Management (NYSE: BAM — $96.56bn) was spun-off in Q4 2022 to simplify the structure of the company. BAM is Brookfield’s overarching structure for fee-generating assets in the renewable, infrastructure, private equity, real estate, and credit sectors. The spin-off left the RemainCo as Brookfield Corp (NYSE: BN — $91.9bn) a lighter asset business. For more on this and other spin-off information Rich Howe and his Stock Spin-offs Investing is the top authority in the space (a biased, but informed recommendation). Today I’ll be focusing on looking at the SpinCo now ~3 years posted spin.

For context, Brookfield, as a greater entity, is a global octopus that has many well-managed branches across real estate, energy, infrastructure, and more. Brookfield despite its size is the definition of high-quality niche capital allocation. The company’s wide reach and strong reputation contribute to crucial advantages in both acquiring capital and finding attractive investments.

Looking Forward:

BAM is positioned to prosper regardless of micro and macro events. They focus on being a part of root solutions. For example, energy and infrastructure businesses. If that is not enough they are also backed by Brookfield Corp (BN) which has significant dry powder that can be allocated opportunistically based on the environment and provides a strong margin of safety for the business. In Q4 2024, BAM restructured BN’s 73% private ownership of the SpinCo (BAM) to public shares. This simplifies the book value and reflects the true value of the company more effectively.

With AI and data-based needs growing rapidly the need for fiber, data centers, and additional energy resources is higher than ever. BAM has already invested in these spaces and is now in a position to experience the associated growth. Someone has to power all of Nvidia’s chips and store the required data, BAM is that someone.

Credit assets account for 30% of AUM. To put that in perspective BAM launched their credit group a year ago. 60% of all capital raised in 2024 was for credit and BAM doesn’t plan to slow that down anytime soon. Management is confident in their ability to raise significant funds and find attractive credit opportunities going forward. During 2024, the company executed its first set of separately managed accounts (SMAs) for insurance clients providing custom credit strategies based on clients’ goals. This is expected to be a major source of future capital. Additionally, the company increased their ownership in the Oaktree, a leading credit firm, from 68% to 73%. This along with two other key acquisitions, Castlelake’s aviation & asset-based credit and SVB Capital, are expected to add $70mm in fee-related income (FRE) annually. Continued investment requires continued funding. The latest fundraising round was 15% larger than the previous round and additional flagship strategies are expected to launch in 2025.

Carried Interest:

“Our carried interest is a large asset—and is not well understood by most investors.” - Bruce Flatt, BN Q4 2024 Letter To Shareholders

For BN and BAM carried interest is the company’s share of profits on an entire fund. The reward is dependent on the fund beating a minimum target. If the targets are hit then the company earns 20% of profits. As standalone events these are valuable, but they are much more powerful as they compound over time. Over the next decade, management estimates ~$20bn in cash flow from carried interest for Brookfield Corp (BN) they value that at ~$30bn today. The same idea is important for BAM although the afterburner isn’t expected to really kick in until 2029, providing a projected ~$2bn in realizations that year, and accelerating from there to a projected ~$7bn in 2034.

In Q4 2024:

Renewable:

The company raised $3.5bn for the second vintage of the global transition flagship strategy with the final close of the fund expected in H1 2025. Additionally, the deployments included a $3.2bn acquisition of Neoen, a partnership with Ørsted (UK offshore wind), and $850mm into Origis Energy (US renewable developer). On the monetization side, they included the sale of Saeta Yield and a partial sale of Shepherds Flat.

Infrastructure:

The supercore infrastructure strategy and private wealth infrastructure fund each funded $700mm respectively and the infrastructure structured solutions fund accounted for $500mm in funds raised. The monetization included a fiber platform sale in France.

Private Equity:

$1bn of funding was for the Middle East fund. $500mm was the second vintage of the special investments fund. Clarios, US car battery maker, was monetized through upfinancing at a $5bn valuation powering $4.5bn in distributions. The initial investment was $3bn of equity to purchase the business.

Real Estate:

$500mm of raised capital included the fifth vintage of the flagship real estate fund strategy and $800mm was deployed from that fund. The final round of this fund is expected to close in H1 2025. The capital was invested into a portfolio of US multifamily properties (~5,000 units), a portfolio of 14 US student housing assets (~9,000 beds), and Tritax, a publicly listed European logistics REIT. The monetized capital included the sale of shopping centers in the UK. In this branch, we’re seeing a sector shift to seemingly better long-term assets (multifamily properties and student housing) from shopping centers which have generally not been viewed as favorably.

Credit:

$9.2bn of raised capital included Oaktree funds and strategies, $1.7bn for the fourth vintage of the infrastructure debt fund, and $900mm across other credit partner managers. Additionally, $6.6bn of raised capital was from insurance clients including $1.3bn related to a UK reinsurance transaction. $2.4bn of deployed capital was from the opportunistic credit flagship fund and $900mm from the strategic credit private wealth fund.

Buybacks & Dividends

With BAM being a spin-off in 2022 we have only a short history to judge shareholder friendliness in terms of buybacks and dividends. Over that period, we have seen consistent dividends in the 2.5-3% range and a forward yield of 2.54%. Prior to the spin, the combined business would pay around 1% and that has generally decreased since the spin showing that the Asset Management business was a key driver for that shareholder compensation method. The company just increased its dividend by 15% and expect to maintain that dividend growth rate going forward. Buybacks, on the other hand, have generally swayed the way of the RemainCo. They still happen at BAM but are less of a focus. It is difficult to justify buying back stock at 3-7x Price/Book or over 20x Price/Earnings as an asset manager so any buybacks at those premiums are a vote of confidence from management in the quality of the underlying assets.

Valuation:

A note on management, Bruce Flatt, the builder of the Brookfield ecosystem we know today, went to the SpinCo as opposed to remaining at the greater Brookfield Corp this is a major vote of confidence for the long-term success of the asset manager.

Looking to comparable companies, Apollo Global (NYSE: APO — $92.11bn) has only a 1.12% dividend yield with that declining significantly and consistently in recent years and comparable buybacks to BAM. Blackstone (NYSE: BX — $126.72bn) has comparable dividend yields and lower buybacks. Apollo and Blackstone trade at 19.33x and 28.52x Price/Forward Earnings (respectively). BAM trades at 22.47x forward earnings and has the advantage of carried interest as a long-term cash flow provider. The company as has the resources of the greater Brookfield ecosystem as a meaningful competitive advantage. This makes BAM look comparatively attractively priced.

Boston Omaha, a company I have written about often, has often been referred to as a micro Berkshire. They tried to escape this narrative and brand themselves as a micro Brookfield instead. While they still have a lot to prove to deserve such an accreditation, I think there is a case to be made both ways. Stay tuned for next Sunday, when I will publish my updated thoughts on the company.

Until Sunday,

Soren

Disclaimer: Soren Peterson and Pillars and Profits Newsletter may hold positions in the securities discussed in this publication. Nothing published in this or other newsletter should be taken as financial advice. Soren Peterson and Pillars and Profits Newsletter are not financial advisors. Always do your own research.