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CEO Bruce Flatt says Brookfield has acquired US$55-billion of assets in the past two years by taking seven public companies private, and he sees it continuing.Chris Young/The Canadian Press

Investors, your short-term thinking and lack of patience is creating opportunities for Brookfield Asset Management Inc.

Brookfield CEO Bruce Flatt was not quite that blunt in his first-quarter letter to shareholders Thursday, but the message was clear. Brookfield has acquired US$55-billion of assets in the past two years by taking seven public companies private, he said – and he sees it continuing.

“Increasingly,” he wrote, “for investors such as ourselves that are capable of buying entire businesses out of the stock market, the strategy is becoming the largest source of transactions as market volatility creates greater opportunity.”

Mr. Flatt said increased program trading by computers is creating greater volatility in the stock markets, and passive indexing, where investors avoid stock-picking and buy a fund based on an entire index, is helping undervalue smaller companies that don’t fit neatly in an index. Less research coverage from securities firms is compounding the problem, he said.

It’s all “increasing discrepancies between a stock’s trading price and its true value,” he said. “In many cases, investors are frustrated and fatigued, and therefore choose to move on at a reasonable premium to the share price.”

“One never knows what the future holds, but for now we see this trend of share price volatility increasing and consequently, there may be more opportunities to buy great businesses," he wrote. Brookfield closed the first quarter with US$36-billion of “deployable capital.”

Examples of Brookfield’s take-private deal making include Forest City in real estate; TerraForm Global and Spanish company Saeta Yield in renewable energy; utility company Enercare; and an Australian company called Healthscope that Brookfield has an outstanding offer for. “We believe we acquired great businesses at reasonable value," Mr. Flatt wrote.

Mr. Flatt’s comments came as the company reported first-quarter results. Net income dropped sharply to US$1.26-billion from US$1.86-billion in 2018’s first quarter. Earnings per share available to common shareholders, which backs out the roughly half of net income attributable to the partner owners of Brookfield’s investments, was 58 U.S. cents per share, versus 84 U.S. cents per share in the prior year. The prior year included a number of one-time gains, Brookfield said.

Funds from operations, an earnings metric that attempts to quantify cash available to Brookfield common shareholders, fell to US$1.05-billion in 2019’s first quarter from $1.17-billion in the prior-year period.

The first quarter saw the close of a US$13.2-billion transaction to buy Johnson Controls International plc’s batteries business, which Brookfield has renamed “Clarios.”

That deal fits into Mr. Flatt’s theme of investor impatience, because the market had grown weary of Johnson Controls’ ownership of what it saw as a low-growth unit.

By contrast, Brookfield sees it as a long-term generator of increasing profits. Mr. Flatt said Clarios is “an essential product supplier to an end market that is constantly growing,” with “a decades-long record of consistent growth in EBITDA and unit profitability throughout business cycles.” (EBITDA, or earnings before interest, taxes, depreciation and amortization, is a profit metric that attempts to approximate cash generation.)

Clarios supplies roughly one-third of the world’s car batteries, and Brookfield expects the total number of cars on the road to grow by 30 per cent globally over the next 10 years. “Clarios will provide batteries to the manufacturers of these cars, as well as replacement batteries, for decades to come,” Mr. Flatt said, noting that electric cars need batteries just as vehicles that use internal-combustion engines do.

Brookfield is also moving toward a third-quarter closing of its deal to buy a majority interest in U.S.-based distressed-lender Oaktree Capital Management. Mr. Flatt said Brookfield will be “the mega-transaction brand” and Oaktree will be “the boutique brand.”

“Similar to Volkswagen, which owns both Porsche and Lamborghini, we believe there is a market for these brands to co-exist, as they offer our clients different strategies delivered in funds of different sizes,” he wrote.

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