Sector

Asset Management

Background

Nima Shayegh is Managing Partner at Rumi Capital Partners. We cover Brookfield's evolution to one of the world's largest alternative managers, what separates it from other managers, and why it's spinning off its asset management business.

Cover

Date

November 25, 2022

Episode Number

85

Brookfield Business Breakdown

Background / Overview

Brookfield is a global alternative asset manager with approximately $750 billion in assets under management (AUM) and $400 billion in fee-bearing AUM. Its operations span real estate, infrastructure, renewable energy, private equity, credit, and an emerging insurance business. The company’s history traces back over a century, initially as an owner-operator of infrastructure and utility assets in Brazil. In the late 1950s and early 1960s, Edgar and Peter Bronfman formed an investment vehicle that evolved into Brascan, a Canadian conglomerate with diverse holdings in real estate, mining, timberland, hydroelectric power, and consumer businesses like Labatt Beer. By the early 1990s, Brascan faced challenges due to over-leverage during a real estate recession, leading to a restructuring under the leadership of Bruce Flatt, who became CEO in 2002. Flatt divested cyclical assets, restructured the balance sheet into perpetual limited partnerships, and scaled the asset management business from $3 billion to $400 billion in fee-bearing AUM over two decades. Brookfield operates in 30 countries, employing a disciplined, opportunistic approach to capital deployment, often capitalizing on distressed market conditions.

Ownership / Fundraising / Valuation

Brookfield’s management team owns approximately 20% of the parent company, valued at around $15 billion, held partly through Partners Limited, a group of over 50 senior staff. Key leaders, including CEO Bruce Flatt, have preferential governance rights, ensuring long-term control. The company is publicly traded, and its structure includes listed perpetual partnerships like Brookfield Infrastructure Partners (BIP), Brookfield Renewable Partners (BRP), and Brookfield Business Partners (BBP). In 2022, Brookfield announced a spin-off of 25% of its asset management business, renaming the parent Brookfield Corporation and the asset management entity Brookfield Asset Management (BAM). The spin-off aims to highlight the asset management business’s value, with Brookfield Corporation retaining a 75% stake. Specific transaction multiples or enterprise values (EVs) for recent deals are not disclosed in the transcript, but Brookfield’s market cap reflects a $45–50 billion equity portfolio plus the asset management business. Fundraising has been robust, with $21 billion raised for its fifth flagship infrastructure fund and $15 billion for a transition investing fund in 2022.

Key Products / Services / Value Proposition

Brookfield’s business model is built on two primary pillars: a principal investment balance sheet and a scale asset management franchise. The balance sheet holds $45–50 billion in equity investments, primarily in long-duration, inflation-protected assets such as trophy real estate (e.g., Canary Wharf, Brookfield Place New York), renewable power plants (hydro, wind), infrastructure (pipelines, railroads, telecom towers), and private equity operating companies. These assets generate $2.5–3 billion in annual cash distributions to the parent. The asset management business manages $400 billion in fee-bearing capital, earning $2 billion in annualized management fees and targeting $2.5–3 billion in carried interest annually. Brookfield’s value proposition lies in its ability to deploy large-scale capital opportunistically, leveraging its global presence, operational expertise, and contrarian investment approach to acquire assets during market dislocations (e.g., post-9/11 real estate purchases, 2009 recapitalizations).

Segments and Revenue Model

Brookfield operates two economically separable units:

1. Principal Investments: A $45–50 billion equity portfolio held through stakes in perpetual limited partnerships (e.g., BIP, BRP, BBP, Brookfield Property Group). These partnerships own underlying assets and distribute $2.5–3 billion annually to the parent. The portfolio is diversified across real estate (~$30 billion in equity, with $8–10 billion in co-investments), infrastructure, renewables, and private equity.
2. Asset Management: Manages $400 billion in fee-bearing capital, including private funds (10–12 years) and permanent capital vehicles. Revenue comes from management fees (1.5% on AUM, ~$2 billion annually) and carried interest (20% of profits above a 5–9% hurdle, targeting $2.5–3 billion annually). The business benefits from long-term client relationships and permanent capital, ensuring predictable revenue streams.

Splits and Mix

• Channel Mix: Brookfield serves institutional clients (sovereign wealth funds, pension funds), high-net-worth individuals, and co-invests through its perpetual partnerships. The high-net-worth channel is an emerging growth area.
• Geographic Mix: Operates in 30 countries, with significant presence in North America, Europe, Asia (e.g., India), and Latin America (e.g., Brazil). India’s portfolio includes 40 million square feet of office space and 200,000 telecom towers.
• Customer Mix: Primarily large institutions, with growing retail investor exposure through listed partnerships and REITs.
• Product/Segment Mix: Real estate (~40% of balance sheet equity), infrastructure, renewables, private equity, credit, and insurance. The asset management business contributes ~50% of distributable earnings (DE) via fees and carry.
• End-Market Mix: Diverse, including commercial real estate, energy, transportation, and technology infrastructure.
• Revenue vs. EBITDA Split: Management fees ($2.5–3 billion, 70% margin) drive asset management profitability. Principal investments contribute $2.5–3 billion in distributions, with margins varying by asset class.

Historical mix shifts show a pivot from cyclical assets (e.g., mining) to stable, inflation-protected assets and a rapid scaling of the asset management business (30% CAGR in fee-bearing AUM over 20 years).

KPIs

• Fee-Bearing AUM Growth: 30% CAGR over 20 years, from $3 billion to $400 billion.
• Distributable Earnings (DE): Sum of principal investment distributions ($2.5–3 billion) and asset management earnings ($2 billion fees + ~$2.5–3 billion carry). DE per share growth is the primary metric for investors.
• Fundraising: $21 billion for the fifth infrastructure fund, $15 billion for transition investing, indicating strong institutional demand.
• Liquidity: $120–125 billion in cash, credit facilities, and uncalled fund commitments, supporting opportunistic investments.

Headline Financials

• Revenue Trajectory: Management fees ($2 billion) grow with AUM (30% CAGR historically). Carried interest ($2.5–3 billion target) is lumpy but increasing as funds mature. Principal investment distributions ($2.5–3 billion) are stable, driven by long-duration assets.
• EBITDA Margin: Fee-related earnings have a 60% margin, carried interest 70%. Principal investments’ margins vary but benefit from inflation escalators.
• FCF: DE (~$7–8 billion) approximates FCF, reinvested into new investments, acquisitions, or opportunistic buybacks. No significant dividend yield focus; capital is retained for compounding.

Value Chain Position

Brookfield operates midstream in the alternative asset management value chain, between capital providers (institutional and retail investors) and real asset investments. Its primary activities include deal sourcing, asset management, operational improvements, and capital allocation. Brookfield’s go-to-market (GTM) strategy leverages its reputation, scale, and track record to attract long-term capital from institutions and co-investors. Its competitive advantage stems from operational expertise, global presence, and the ability to execute large, complex transactions (e.g., acquiring pipelines in South America). The company is vertically integrated in its investment process, from sourcing to management, but selectively partners with specialists like Oaktree for credit.

Customers and Suppliers

• Customers: Sovereign wealth funds, pension funds, high-net-worth individuals, and retail investors (via listed partnerships). Clients value Brookfield’s track record and alignment (co-investment in funds).
• Suppliers: Capital providers (lenders, co-investors) and operational partners (e.g., local management teams in 30 countries). Brookfield’s scale reduces supplier power, as it can source capital globally.

Pricing

Brookfield earns 1.5% management fees on fee-bearing AUM and 20% carried interest above a 5–9% hurdle rate. Contracts are long-term (10–12 years for private funds, permanent for partnerships), providing revenue visibility. Pricing is driven by reputation, scale, and mission-criticality for institutional clients, with minimal fee compression compared to public markets. Principal investment returns depend on asset-specific yields, often enhanced by inflation escalators and operational improvements.

Bottoms-Up Drivers

Revenue Model & Drivers

• Revenue Model: Management fees (1.5% on $400 billion = $2 billion) are annuity-like, driven by AUM growth. Carried interest (20% of profits) targets $2.5–3 billion, contingent on fund performance. Principal investments generate $2.5–3 billion in distributions, driven by asset cash flows.
• Pricing Drivers: Reputation, scale, and alignment ensure stable fees. Inflation escalators in real estate and infrastructure contracts protect revenue.
• Volume Drivers: AUM growth (30% CAGR) is driven by fundraising, new verticals (e.g., transition investing), and geographic expansion (e.g., India). Principal investment volume depends on opportunistic acquisitions during market dislocations.
• Mix: Asset management (~50% of DE) is high-margin and growing faster than principal investments. Real estate dominates the balance sheet (40%), but infrastructure and renewables are expanding.

Cost Structure & Drivers

• Variable Costs: Minimal in asset management, as managing additional AUM requires few incremental resources. Investment staff receive 30% of carried interest, reducing net carry margin to 70%.
• Fixed Costs: Overhead includes operational teams in 30 countries, office costs, and R&D for new verticals. Fixed costs are low relative to revenue, driving operating leverage (60% fee margin, 70% carry margin).
• EBITDA Margin: Fee-related earnings (60%) and carried interest (70%) are high-margin. Principal investments’ margins vary but benefit from scale and inflation protection.
• Cost Trends: Fixed costs remain stable as AUM scales, enhancing margins. Variable costs (e.g., carry sharing) are performance-driven.

FCF Drivers

• Net Income: DE (~$7–8 billion) reflects cash from fees, carry, and distributions, net of operating costs.
• Capex: Low for asset management (capital-light). Principal investments require maintenance capex (e.g., infrastructure upkeep) and growth capex (e.g., greenfield projects), but specific figures are not disclosed.
• NWC: Minimal working capital needs due to fee-based revenue and stable asset cash flows.
• Cash Conversion: High, as DE closely approximates FCF, reinvested opportunistically.

Capital Deployment

Brookfield reinvests FCF into new investments, acquisitions (e.g., Oaktree), and opportunistic buybacks. Historical buybacks were modest (e.g., 2008, 2020), as the company prioritizes internal opportunities with mid-teens returns. Dividends are paid across entities but are secondary to reinvestment. New ventures include reinsurance, transition investing, and partnerships (e.g., $16 billion Intel fab deal).

Market, Competitive Landscape, Strategy

Market Size and Growth

The alternative asset management market is large and growing, driven by institutional demand for real assets and private markets. Infrastructure and renewables are high-growth segments, with Brookfield raising $21 billion and $15 billion for these funds, respectively. The market is segmented by asset class (real estate, infrastructure, private equity) and geography (North America, Europe, Asia). Growth is driven by volume (increasing AUM) and price (stable fees).

Market Structure

The market is consolidated, with a few large players (Brookfield, Blackstone, KKR) dominating due to scale and reputation. Minimum efficient scale (MES) is high, requiring significant AUM to achieve operating leverage. Brookfield’s $400 billion in fee-bearing AUM and $120–125 billion in liquidity position it as a market leader.

Competitive Positioning

Brookfield competes on scale, operational expertise, and contrarian investing. Its ability to deploy large equity checks (e.g., $5–10 billion) and secure nonrecourse financing sets it apart. The company targets low double-digit to 20% returns, outperforming fixed income alternatives.

Hamilton’s 7 Powers Analysis

1. Economies of Scale: High fixed costs (global operations) and low variable costs drive 60–70% margins as AUM scales.
2. Network Effects: Limited, but co-investment with perpetual partnerships strengthens client relationships.
3. Branding: Strong reputation as a blue-chip firm ensures fundraising success and pricing power.
4. Counter-Positioning: Contrarian approach (buying in distress) differentiates Brookfield from capital-light peers.
5. Cornered Resource: Operational expertise and global presence are hard to replicate.
6. Process Power: Disciplined, phased investment process (e.g., India expansion) minimizes risk and maximizes returns.
7. Switching Costs: Long-term contracts (10–12 years) and permanent capital create client stickiness.

Strategic Logic

Brookfield’s strategy focuses on compounding capital through reinvestment, leveraging its balance sheet and asset management float. It avoids over-leverage, using asset-specific, nonrecourse debt. Expansion into new verticals (reinsurance, transition investing) and geographies (India) drives growth. M&A (e.g., Oaktree) enhances capabilities but is selective to avoid diluting high-margin businesses.

Risks

• Interest Rates: Rising rates increase discount rates, impacting asset valuations. However, inflation escalators and high target returns (10–20%) mitigate this.
• Real Estate Exposure: $30 billion in real estate equity faces scrutiny due to office/retail challenges, but long leases (15+ years) and trophy assets ensure durability.
• Reputational Risk: Conflicts between entities and clients could erode trust, though Brookfield prioritizes client alignment.
• Complexity: The corporate structure’s complexity may deter investors, though improved disclosures mitigate this.

Key Takeaways

Brookfield’s business model is unique due to its symbiotic balance sheet and asset management pillars, enabling it to reinvest $7–8 billion in DE at mid-teens returns. Its contrarian, operational approach and global scale allow it to capitalize on market dislocations, while long-term contracts and permanent capital ensure revenue predictability. The company’s disciplined expansion process, high margins (60–70%), and alignment with clients and management (20% ownership) create a durable competitive advantage. Emerging verticals and selective M&A offer growth optionality, though reputational and interest rate risks warrant monitoring.

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