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Everyone – make that just about everyone – loves Brookfield’s sprawling investment empire and this week demonstrated some of the reasons why.

On Wednesday, Brookfield Asset Management Ltd., BAM-T the pure-play alternative-asset manager that was spun out of parent Brookfield Corp. in December, delivered its first earnings report. It said it raised US$93-billion in capital in 2022, a record for the Brookfield group.

A day later, Bruce Flatt, chief executive of Brookfield Corp., reiterated his commitment to continue delivering compound annual returns of 15 per cent a year or better. He also declared his willingness to accelerate share buybacks if Brookfield Corp.’s stock continues to languish below the company’s estimate of its true value.

No wonder Bay Street and Wall Street are entranced by the Brookfield saga. Ten out of 12 analysts rate Brookfield Corp. as “buy” or “outperform,” according to FactSet data. Five out of eight have a similarly upbeat take on Brookfield Asset Management.

Only a curmudgeon would swim against this torrent of positivity. So, on behalf of curmudgeons everywhere, let me step forward and attempt to do just that.

It’s not that I doubt Brookfield’s investing acumen. It was early to recognize that pensions and other institutional investors could benefit from alternatives to traditional stocks and bonds. By catering to the growing appetite for alternative investments – things such as infrastructure, property and clean-energy generators – Brookfield trounced the S&P 500 index over the past 20 years while growing its assets under management by a remarkable 20 per cent a year. Those are stunning results.

But Brookfield’s complexity and Rubik’s Cube of interlocking corporate entities have always left me cold. The reconfiguration in December offers a case in point.

It saw the old Brookfield Asset Management Inc. (ticker: BAM.A) change its name to Brookfield Corp. (BN), while spinning off 25 per cent of its asset management business to shareholders. This spinoff created the new Brookfield Asset Management Ltd. (BAM), which continues to be 75 per cent owned by Brookfield Corp.

If you had to read that twice, you have just experienced what trying to navigate the Brookfield maze is like. Back in 2020, the Financial Times described Brookfield as “not so much a company as a giant, triangular jigsaw board.”

To make sure I was getting a full picture of this jigsaw board, I talked to Dimitry Khmelnitsky, head of accounting and special situations at Veritas Investment Research Corp. in Toronto, who has written several reports on Brookfield in recent months. He has emerged as a lonely dissident from the current enthusiasm around the company. He has a “sell” rating on Brookfield Asset Management and a “reduce” recommendation on Brookfield Corp.

For a bearish analyst, Mr. Khmelnitsky is surprisingly complimentary about Brookfield. He applauds the group’s impressive track record and acknowledges it will continue to benefit from the shift toward alternative investments.

His point is that past is not always prologue. Over the past two decades, Brookfield rode a continuing fall in interest rates that encouraged the shift toward leveraged bets on alternative investments. Now, with interest rates at higher levels – potentially for a while – that logic could go into reverse.

High interest rates increase the cost of the empire’s considerable borrowing needs. They also reduce asset values, making it more difficult for Brookfield to exit from past investments on attractive terms. On top of that, higher rates increase the appeal of competing assets such as investment-grade bonds.

Mr. Khmelnitsky doubts the Brookfield group will be able to attract new investors at the same torrid pace it has in the past, particularly if high rates are coupled with a recession. This will mean slower growth in management fees and in the earnings that flow from those fees.

“Management’s forecast of more than doubling fee-related earnings over the next five years, unveiled during 2022 Investor Day, may be optimistic given the negative impact of rising rates and falling asset values,” he wrote last year. He has a target price of US$21 on Brookfield Asset Management’s New York-listed shares, well below the US$34 territory they now trade in.

Any pain at Brookfield Asset Management would flow through to its majority owner, Brookfield Corp. Mr. Khmelnitsky has a US$31 target on the shares of Brookfield Corp.’s U.S.-listed shares. They are now trading around US$36.

Among Mr. Khmelnitsky’s concerns are worries about the cash distributions that Brookfield Corp. collects from its “perpetual affiliates” – businesses in which Brookfield Corp. holds a stake but which operate separately. These affiliates include Brookfield Infrastructure Partners L.P., Brookfield Business Partners L.P. and Brookfield Renewable Partners L.P.

Mr. Khmelnitsky questions the ability of these affiliates to sustain their distributions unless they can start making significant gains on asset sales – a difficult task against a backdrop of rising rates and slowing economies.

The market appears to have some qualms of its own. The unit prices of all three of the publicly traded affiliates have performed poorly over the past year.

So how should a curmudgeon approach the possibility of investing in the Brookfield empire? Oddly enough, I feel more enthusiastic about the long-term prospects than I did before talking to Mr. Khmelnitsky.

As he wrote in his first report last year: “We recognize that even if BAM achieves half its targets over the next five years, its stock price could have upside from current levels.”

However, I also share his concerns about what the immediate future holds. If interest rates remain elevated for a couple of years, and the economy slides into recession, the Brookfield model could hit bumps. Investors of a curmudgeonly nature may want to wait for evidence that rates are headed down before jumping on board.

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Follow Ian McGugan on Twitter: @IanMcGuganOpens in a new window

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