Brookfield Asset Management is a global leader in what are called “alternatives,” but its CEO Bruce Flatt says that if global trends continue, those assets won’t be so alternative anymore – and Brookfield can win big.
Brookfield has hundreds of billions of dollars invested globally in things like real estate, infrastructure and renewable power. These asset classes are called “alternative” because they’re not the simple stocks and bonds that make up so many ordinary portfolios. As institutional investors chase higher returns, they’re plowing more money into “alternatives” instead – and one day they may be the majority of global portfolios.
Mr. Flatt says that lower-for-longer interest rates – they’re now negative in Japan and Europe – can cause the trend to accelerate. “Should this interest rate environment continue to prevail, and with institutional capital growing. ... We think that institutional investors will continue a push towards 60 per cent alternatives allocation in their portfolios – from a global estimate of 25 per cent today," he said in a letter to shareholders.
Mr. Flatt’s comments came as Brookfield released third-quarter results. Shareholders sent the shares to 52-week highs in early trading. Brookfield’s Toronto Stock Exchange listed shares hit $77.06 before closing at $76.57.
Mr. Flatt is not alone in saying this trend will continue in a big way. Mark Wiseman, former Canada Pension Plan Investment Board CEO, told a Toronto audience in October the move was “profound." CPPIB itself has nearly half its $409.5-billion portfolio in private equity – the ownership of private companies, often aided by substantial borrowing – and assets like real estate, infrastructure and direct ownership of energy generation.
Brookfield, however, is one of the few private-sector players that can play in this sandbox, and pass along gains to public shareholders. Brookfield invests its own money, as well as that of its investment partners, in a wide range of assets. It owns a portion of four related partnerships that trade on U.S. and Canadian exchanges: Brookfield Property Partners, Brookfield Renewable Partners, Brookfield Infrastructure Partners and Brookfield Business Partners.
It closed the quarter Sept. 30 with US$385-billion in assets under management, and subsequently added Oaktree Capital Management, pushing the number above US$500-billion.
It also completed its fifth private-equity flagship fund, raising US$9-billion and bringing total fundraising for its current batch of funds to US$50-billion. Mr. Flatt told shareholders Thursday that with the growth of Brookfield’s strategies, plus the addition of Oaktree’s debt offerings, the company expects the next round of fundraising for its flagship funds of 2021 and 2022 to be on the order of US$100-billion.
“Where continued large amounts of capital get allocated to alternatives, there are not too many people that have the operating capabilities and the scale that we have to be able to compete,” Mr. Flatt said in an investor call Thursday. “We’ve spent a long time building up [alternative managers’] skills. And people seem to be willing to compensate us for running essentially an outsourced investment management organization for them in alternatives, because it’s tough for most people to do what we do.”
Fee-related earnings – the money it takes in for its investment management – were US$1.03-billion in the 12 months ended Sept. 30 and has grown at annual rate of 23 per cent over the past four years. In August, Brookfield projected it will produce more than US$5-billion in cash a year by 2023 – more than double 2019’s forecast of US$2.55-billion and a fivefold increase from 2015.
Brookfield said its funds from operations in the quarter ended Sept. 30 were US$826-million, or 80 US cents per Brookfield share, down from US$1.09-billion, or US$1.07 per share, in 2018’s third quarter. The prior-year period measure was boosted by US$401-million in gains on sales of assets, while Brookfield recorded just US$125-million in in gains in 2019’s third quarter.
David Milstead