Brookfield Asset Management Ltd. (BAM) Earnings Call Transcript & Summary

It's my pleasure to introduce Bruce Flatt, CEO of Brookfield Asset Management. About a year ago, Brookfield completed its spin-off from Brookfield the Corporation, which Bruce actually hinted at our conference the year prior to that. We'll see if we get any more interesting nuggets from you this year. Essentially became a stand-alone asset management business with 100% earnings coming from FRE, which is great. Today, Brookfield is one of the largest global alternative asset managers with $440 billion in fee-generating capital and strong alignment across several secular themes in the space including infrastructure demand, energy transition, growth in private credit, along with many others. Despite what's been obviously a very challenging fundraising backdrop, you guys are on track to raise $100 billion of capital this year with AEL potentially on top of that, whenever that closes. A great year, and thank you again for being here. It's always great to see you.

Thanks for having us.

I'll start this conversation along similar lines that the discussion went on a number of the CEOs today was around private market asset allocation trends. When you have this massive move in interest rates, clearly, that's going to drive some rethinking on behalf of institutional Ps on what role private markets play in their asset allocation. Would love to get your perspective on what does the allocation probable markets look like in a world of higher interest rates? More importantly, how does that change the mix of asset allocations within the sector?

Starting more broadly, from 30 years ago, institutions globally have been working on figuring out how to have alternative products within their portfolios. That's gone through many evolutions of the financial markets, collapses in the financial system, recessions and what is crystal clear to us is that alternatives within portfolios of large entities are very attractive to the long-term returns for those portfolios. They take away the distraction of the public markets and they earn extra return because of the inherent liquidity within it. Leaving aside yearly movements, which come and go, I would say we continue on another 10 years at least where significant greater allocations are going to alternatives. I'll come to it, with specific ones was your second question. We increase, many funds are still at 5%, 10%, 15%, 20%. People often ask me what they should have in their portfolios. The simple story is, anything you do not need for liquidity purposes in your most extreme business planning should get put into alternatives because you don't have the distraction and you earn a higher return. That's what the most advanced institutions are doing, the others follow it. I don't think this period of time of consternation in some funds largely focused in the U.S. is going to stop that. We will continue for many years to go. Within that, we're still seeing very significant allocations to infrastructure globally. Allocations are still very, very small, and we're the large fund in that. We're getting big allocations. As a subset of that transition is even smaller within portfolios because of its, I'll call it, creation over the last little while, and seeing big allocations to that. Private credit, obviously, is a significant. Real estate and private equity are probably the largest in the funds today. Therefore, people are not getting money back. They're the most strained in particular, technology. What I can tell you is there are many institutions in Asia that are putting very significant allocations into alternatives even today and the Middle East, in particular. While there were some institutions in the United States that are full, and need time to process. There are other institutions that are using this opportunity to scale up. The short story is it's not stopping. There are some sectors that are still pretty strong.

One of the big themes you talked about and that's something we see covering this space, of course, as well is consolidation of LP interest with fewer asset managers. We've seen that unfold in many other verticals within financial services is not just new to the alts. It is interesting because it feels like it's earlier days in the old space. When you look at your LP base and you look at the variety of products that you guys provide to the marketplace, how big of a market share opportunity does that create for Brookfield? Are there specific products that are more susceptible to that consolidation of market share for you?

Part of consolidation in this business, it's different than if you sell chocolate bars or soft drinks. Part of it is just the limited partners are choosing to be with certain institutions, and therefore, those get bigger and the other ones can't really survive, so they either just go out of business or aren't relevant. Part of it is just driven by LPs. We just closed our infrastructure fund at $30 billion. We didn't have to do anything and we're consolidating some people out of the business because they chose to be in our fund, not in somebody else's. That's happening. Second, look, there's no doubt the large managers, which we have the benefit of being one, have vast fundraising machines are very global, touch every institution, and we can package products, relationships and things with institutions and do special things with large groups that a single fund of X amount of dollars that's vastly smaller than us just can't do. They can't afford to be in Korea, as an example, with somebody in their office every morning, talking to them about how we help them. They also just for the big ones, they can't give them the scale. Our funds can take $500 million, $1 billion, $1.5 billion, $2 billion commitments. You need to be very large funds to take those size of commitments, and there's just not that many people in the world that can do that. I think it's a common, consolidation is a combination of just the smaller going away and the larger getting the allocations. 2, there will be some niches along the way where we can add in skills, which we may not have today, Oaktree acquisition was one of those. We did 5 years ago. It just advanced us quickly, and we were able to assist in ways that could help them grow their business. That's really what the consolidation is today. It's our vast fundraising machine we have, the relationships we deal with the multi offices we have around the world and all those things just add extra benefit to those joining us if we chose to do that.

Let's spend a couple of minutes on the business itself. As I mentioned in my introduction, it's been about a year since you completed the spin-off of BAM from the corporation. It comes with a bunch of benefits to the shareholder base. One of them obviously being it's a cleaner story. You get a pretty clear 100% FRE earnings stream. Are there any other benefits that shareholders get anything from the structure that might go unnoticed?

After a long time, we have the cleanest structure of any alternative manager out there. We have no debt. We have $3 billion of cash. We generate $2.25 billion of earnings a year. It grows at 15% to 20%. It should grow in the next while at that. We pay out 85% of the earnings. It's a very simple clean story. I'd say the real maybe difference, it's not better or worse. It's just different. The real difference is we got lucky being industrial business owners from a long time ago. Our infrastructure franchise is -- there's nothing like it in the world. That allowed us to build out a transition franchise, which now is -- there's nothing like it in the world, and I think it's only going to get bigger and bigger in the next 10 years. Those 2 areas give us something that very few people have. We have a private equity business just like everybody else, and we have a real estate business, yes, like a few. We have a credit business like some, but those 2 franchises we have are something very special. There's 3 things going on in the world that I would say hit all of our businesses but hit those 2 specifically, and it's the decarbonization of everything, the digitalization of your phone and what's behind it and all the data centers and fiber and towers that are getting built and what's going on with just the deglobalization of everything, manufacturing plants, industrial capacity, chips coming back from Asia, the transaction we did with Intel. All of the things that are going on, there's just this enormous push of need for capital in those businesses. We just happen to be in the right spot for now, but it looks like those 3 themes are here to take maybe even greater amounts of capital than they have for the next 5-10-15 years. We've got 5-10-15 years of this and the amounts of capital being put into the digitalization sector, both towers fiber, but now with AI and the build-out of data centers, it is massive. I've not seen anything like it. What is needed as we ramp up decarbonization around the world is varied. It's tens and tens of trillions. It's very significant. Manufacturing capacity gets built somewhere. It's just they need diversity of sources. India has been a big beneficiary of that as an example.

Lots of durability in those strengths for sure. Let's talk about a couple of them. I want to start with the Transition business. Brookfield is obviously one of the largest renewable power and transition business in the space. Lots of momentum, very timely just last week, there was an announcement that UAE has made a $2 billion commitment to your current Transition Fund. I think $1 billion commitment to see the launch of the new fund called Catalytic Transition Fund. Can you talk a little bit about both of those, how they came together and the plans for further branching out around this transition theme?

I'd just say that we got lucky in that we were in the renewables business as an industrial owner for 30 years. 15 years ago, we started doing that for some clients in our Infrastructure Fund. 3 years ago, we decided the opportunity was very big, and therefore, we had to split it out of our Infrastructure Fund. We launched a transition fund 3 years ago. We raised $15 billion for our first-time fund, which was really not a first-time fund because we had always done it in infrastructure. It's been very successfully invested. I think because we had the history, we had a head start and the business, what's going to be something that is going to be enormous, institutions want to get in on it now. We're out raising our second fund as we speak. The one thing I can say about the fundraising is we did just get a commitment from one of the Abu Dhabi funds for $2 billion. In addition to that, we're sponsoring a new fund with them where they're putting up $1 billion. It will be for emerging markets. Our main fund is investing in developed markets. There $1 billion is going into a new fund that we're going to raise, which will be for emerging markets. I think the spin-off funds or the next iteration of all of these in transition will be very significant. This business didn't exist 4 years ago. I think between the different spin-offs we'll have at this fund, it will be our largest business probably within Brookfield. Within 5 or 7 years. We have an Infrastructure Fund of $28 billion and a $15 billion Real Estate Fund. $12 billion private equity and $15 billion opportunistic credit, et cetera. I think this will be the biggest business we have because the opportunities are very significant, and we happen to be in a good spot.

Is the velocity of capital, they're similar, faster, slower meaning the amount of time it takes to put capital out given all these needs for climate-related transition, which seems like they continue to build?

The trick here is most people can't do what we do because they don't have the renewable power expertise. They don't have a power trading expertise, and they don't know how to build all of these things. That's what we have. You can raise money, but you don't know how to arbitrage power markets and build power plants. If you do, you can compete with us, but not many people do. We just have a head start. Others will come. They're coming. They always come. Where there's money, people come. That's not to say there won't be competition, but we just have a big head start, but we also have a bunch of ignite operating talents within our businesses. We have 3,000 operating people that run our business that work for Brookfield in power trading and development, and that gives us an edge that very few other people have. We really compete with single industry participants that trade on the market and what they don't. They have what we have in industrial operations -- but what they don't have is the access the money that we do. Really, our success over 25 years has been ensuring we had operating talent combined with the most money in the world. If you can get those 2 things aligned, you can earn more than the -- only the financial players and you have access to more money than just the industrial players. That's the trick of -- that's, I guess, the secret side of what we've tried to do with Brookfield over the decades.

Let's talk about the second theme you talked about, which is obviously digital infrastructure and what that means for your infrastructure business. As you mentioned, your latest flagship Infrastructure Fund also closed last week, $28 billion, I think, and there was a little more on top of that.

It's a big week for closing.

It seems like it.

Why does everything have to come at the end of the year? I don't know.

I'm happy to happen before the conference and we can talk about it. We'll take that. As of the last update, I think you guys were about 40% deployed in that fund already, which is pretty fast. How are you thinking about deployment pipeline from here? What differentiates you in the Infra business? Because again, to your point earlier, it is getting more crowded. There are other larger players coming in into the space as well.

Yes. We're 40% invested. It's 4 deals. It's not a lot of things to have been done. They all fit one of those themes -- we bought 2 great data center businesses. We did the Intel transaction in the fund, and we bought a logistics container business, global logistics container business. Those 4 businesses, we probably normally wouldn't have found 4 great things like that within a short period of time. As you know, 2023 from January to June was pretty rough in the markets. Globally, everyone knows this. Interest rates were cranking up like this, and everyone was petrified about doing transactions, just given the fact that we have large sums of money to put to work. All of our businesses, we put, I think, $60 billion to work in that period of time. Four of those were the deals that went into the infrastructure fund. I'm super excited about every one of those deals we did because when there is lack of investment capital and nobody else bidding. Usually, it doesn't mean you get the most extreme deals, but usually odds favor returns being better than you would otherwise have. I think everything we bought in the last 12 months will be -- other than if we make some mistake, they will be excellent vintage investments to have made. We decided to put our foot on investing when nobody was investing mostly because we could, and that's why that fund is 40% invested because we just found some great opportunities to put it in fund.

The pipeline as you look forward?

Yes. pipeline, look, there's still -- you talked about it, many sponsors don't have money. It's tougher to get money in the banks. It's easier today than it was 12 months ago. It's still not robust. That just means there's less capital, and therefore, the opportunities are significant. We see across private equity across real estate across credit across infrastructure renewables, every single one of them for different reasons, there are significant opportunity. I'd say it still exists. It's not as good as it was in March of last year, March of last year, there was literally no bid on lots of things. Like some of the transactions we did zero bid. That does not happen in many times in the market.

You mentioned real estate. Let's talk a little bit about that as well. The market continues to be pretty uncertain. You suggested that the next several years will be excellent time to deploy capital. You guys are fortunate to have, obviously, dry powder in that part of the business as well. Can you help us frame opportunities for new investments or sectors, geographies versus some of the risks in the back book that you may have in your existing portfolio?

I just frame real estate. It's the largest business in the world. We've been around in it for a long time. It's been a great business and our returns over 34 years have been in the 20s. There are times like this, I can go back 5 iterations and it's been a lot worse than it is today. Actually, I do not think that anything has changed, and there's anything that is different today. The most important thing from our perspective is that all of our long-term assets, mostly in office and retail, they're owned in our -- the perpetual balance sheet, the parent company. They've owned most of those assets for 25 years plus, and it's perpetual money and it just will be there for time. The real thing with real estate is you have to be able to survive through periods of time. In our fund business, we have virtually no office exposure and very little retail exposure in the United States. It's mostly multifamily, logistics, life sciences, and alternative student housing, things like that. The business has been very, very good and the returns look to be excellent. We're not worried at all about office. What we mostly own even on the balance sheet for office, it's very high-quality office and there's a big dispersion, high-quality office around the world, even in the United States is very strong. It's low-quality office, which is struggling and it's going to continue to struggle and that happens all the time. It's just worse this time because of the COVID effect, I'll call it. On the opportunity side, I think there's going to be some excellent opportunities and they split into 2 buckets. Bucket one, which we're not too interested in is bad assets that you have to do a lot of work to turn around or to redevelop. We have too much money for that in scale, where the opportunities are coming are great assets, which have not bad capital structures, they are capital structures, which are not appropriate for the environment that we're sitting in today because interest rates went up and you have floating rate financing or whatever that is. The easiest way to make money in real assets, especially in real estate is to buy great assets with bad capital structures. Fortunately, there will be a number of those situations, and they're not coming one day or there's not going to be just an event, but they're just going to be coming over the next 24-36 months. Hopefully, we can capture some of those opportunities to put into our portfolio.

Let's talk about your private credit business. It's a sizable one, that $60 billion in illiquid private credit strategies and Oaktree opportunistic business is part of that, but then there are others as well. As you think about the opportunity set for private credit, which is substantial, as we obviously talked about in the past, as we talked about over the last couple of days here, what are your plans to further expand Brookfield's private credit capabilities. Is this likely to be organic build or M&A?

We don't need anything else to keep growing the credit business. We have it all within the Oaktree franchise and within Brookfield, the different products we have. It's possible there are niches or there are businesses that come to us that could be highly additive that we could just roll into the fold. We continuously look at those types of opportunities. There is really what this is, is that regulatory capital requirements going up in the banks globally, and they need partners to have capital off balance sheet, and we're either partnering with them or investing beside them in loans. It's really simple. It's just having more capital for the business to lend to private enterprise. We're very excited about continuing to grow the business. I'd say our Oaktree franchise made its name in opportunistic investing in credit. That will stay and we'll continue with that business, and that's a separate business. We now have a private credit business set up, and we're going to continue to grow that. It will be big, partly backed by a lot of our insurance clients, including the Brookfield business that we manage capital for.

Let's talk about Oaktree for a couple of minutes. Just given how important private credit is, this partnership is obviously quite critical in your efforts there. Yet the business operates largely separately. They still have their own infrastructure -- is there an opportunity to bring these businesses closer together to drive incremental revenue and expense synergies? I guess what's holding you back from purchasing the rest of the stake? I think you guys own 68% of the company right now.

Yes, just 70%, I think we bought a few percentage points last year. The deal was when we bought firm that we would -- there was an opportunity for them, the partners to stay in and be owners with us. They also can put to us over time if they want to phase out of the business. We've never had to own everything. I'd rather have them be responsible for the business, care about the business and be our partners in the business. They're very responsible. They're very good at what they do. We have no need nor desire to own 100% of the business. I suspect there's small amounts of expense synergies you would get if you combine businesses. Our thesis in business has always been accountability and compartmentalization of businesses is always better than the small amounts of cost synergies you give by merging things together. When you merge things together, you get cost synergies, but what you lose often is the accountability and the culture you get from having a separate business. I think even if we brought much more of the business, we would run it separately because it is a different mentality. It's a different business and it's a different culture. People businesses like ours is are very particular and being respectful of that is something that's really important. We're no need nor desire to actually go higher. Over time, will naturally go higher because some of the shareholders will sell to us. There's no great need to do it today.

Let's touch base on retail expansion. That's obviously another important theme for the space. You have made an effort with a couple of products out there likely to do more. Give us an update on traction you're seeing with the existing products in the retail wealth management channel? What else is on your priority list in terms of both product expansion and distribution platforms extension into '24 and '25.

We think of retail with a couple of lenses. First one is there's no doubt that what we saw 25-plus years ago in institutional management is coming to retail over the next while. The next 25 years, I think -- you may not see the exact same increase in amounts, but you're going to see a similar increase in amounts in retail because alternatives are what people should have in their portfolios, and therefore, that will happen. All it takes is education and products properly designed for the market, and that's slowly coming. We're continuing to build our resources. We have a very large group of people dedicated to marketing these products. We have a number of products in the market, both under the Oaktree brand and under the Brookfield brand. We raised probably $250 million a month today in specific retail products, call them semi-liquid products. The largest 2 of those are Brookfield Income Infrastructure Fund, the II is called, and it was launched in Asia. We're now launching in the U.S. in retail and then one of the credit products we have under the Oaktree brand. We'll have more and it's going to continue to grow. There's not too many, again, back to consolidation and what you asked me on the first question, there's not too many people that can have 150 salespeople the back office, the relationship with banks and all those things and have a brand to sell in the systems. Therefore, it will continue to grow and go to the large sponsors with a good track record. In addition to that, with our relationship with Brookfield Corporation, they're selling annuities into broad America, and that capital comes to us under management arrangements to manage the capital, and they're selling $500 million a month that comes to us. It probably goes to $1 billion a month and maybe $1.5 billion a month, very shortly thereafter in the next well. That money is broad annuities across America, which comes to us and it's hitting 2 separate groups of the market. That's the way we think of significant scale. The second pool is very well designed because it has long terms on it. It's perfect for these types of assets to back.

You mentioned insurance. I did have a quick question on that. AEL is on track to close in short order here. It's an important again, source of growing your private credit business and as a lot of the capital will be allocated ultimately to your insurance partnerships like that one. How do you view the opportunity for additional M&A in the insurance space, you guys have obviously grown in that business largely inorganically?

I'm here with the Brookfield Asset Management CEO. Our goal is for -- to encourage the insurance affiliate, which we have no investment in. We just manage capital for them to grow as fast as they possibly can and give us as much money as they possibly can. The good news is they've gone from $0 to $100 billion. Organically, it will grow to $250 billion in a very short period of time. The goal is of that business to grow large. In addition to that, what it's allowed us to do with a team within Brookfield Asset Management is to spend time designing products and understanding exactly what insurance companies need with all of our products, and we're getting better and then not only servicing them but servicing all of our other insurance clients. They used to tell us we need XYZ because our regulatory ratios, and we just say take this. Now we're much more respectful of their issues. We're designing products for them. I think it's going to be game changing for that segment of our distribution because we're getting better and better with how we turn our products regulatory-wise for them.

What about acquisitions at the Brookfield Asset Management level? You guys mentioned a couple of times, including obviously, today, the balance sheet is a great shape, $3 billion of net cash, no debt. You talked about M&A potentially being on the table. Can we narrow that down a little bit? Are these largely tuck-in deals, you talked about credit, maybe adding a few capabilities here and there? Or is there room for something larger and more substantial at the BAM level?

I don't know. I'd say in the absence of anything else that really made sense, it will be tuck-in transactions or none. It may be nothing. We may just keep doing what we're doing, keep compounding away if giving the cash back to shareholders with share repurchases and dividends and do nothing more because we have an amazing business. There may be other businesses. We bought 3 or 4 others other than Oaktree, we bought through for other franchises over time and tuck them in. There may be -- I suspect there will be tuck-ins of smaller businesses, and there may be something that's larger and probably not as large as us with a $60 billion market cap. There aren't too many of them. There may be some other moderately sized businesses that we could tuck in that they would make sense because it either gave us greater geographic exposure or greater product exposure, which we don't have today, there aren't many things we're not exposed to.

Product-wise, you guys kind of check all the boxes.

I used to say that years ago, and we always find something.

Maybe not secondary.

What is amazing, Alex is -- I actually went through this the other day, and I went back to 25 years ago as to what we were talking to people about and putting into our funds, and it's vastly different today. It's amazing. We just invest in the backbone of global economy. That's all we do. The backbone of the global economy has shifted dramatically over 25 years. It's amazing, and we didn't invest in data centers before. We didn't buy telecom towers before. We didn't make semiconductor chip plants before. We didn't build life sciences buildings before. You can go through the whole, we didn't build solar plants. We didn't build wind plants. All of the things that we do today, it's probably 20% of what we do now. We did 25 years ago. It's still the backbone of global economy, but what's amazing is the backbone shifts with the evolution of technology, people, places and investments. What we're trying to do is always think about what's the next backbone thing that can drive this business further and Transition is an example, the business didn't exist 5 years ago in our company. If possible, -- it will be the largest business we have 5 years from now. That's amazing.

It's pretty fascinating. Great. Well, look, we're out of time. Thank you so much Bruce. Always good to see you here. I appreciate it.