Brookfield Asset Management

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Brookfield Asset Management (BAM) is a global alternative asset manager, focused on real estate, infrastructure, renewable power and transition, private equity, and credit. It generates revenues primarily through management fees and incentive fees earned from these investments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Brookfield Asset Management (BAM) stands as one of the world’s largest alternative asset managers. This means that they invest in assets that are not traditional, publicly traded stocks and bonds. These include large infrastructure projects like toll roads, renewable energy production facilities, and massive commercial real estate holdings. What sets BAM apart is its expertise in operating these real assets, not just owning them. They’re involved in the day-to-day management of these businesses.

Brookfield is known for its specialization in the operation of these assets, and it leverages them to generate management fees, and performance-based incentive fees.

BAM’s revenue streams are diversified across several asset classes and multiple geographies. This provides a buffer against slowdowns in any single sector or market.

  • Fee Revenues: A significant portion of revenues comes from base management fees, which are a percentage of the assets under management (AUM). This provides recurring and stable revenue.
  • Incentive and Advisory Fees: These are performance-based fees earned from funds that have generated above-average returns, aligning their interests with those of their investors.
  • Other revenues : The remaining revenue streams are derived from various sources, including financing activities, lending and insurance.

The global economic environment, with its increasing focus on sustainable infrastructure and renewable energy, is a tailwind for BAM, driving increasing investor interest and capital flows. However, it also has many competitors like Blackstone and Apollo, which they will continue to face in the near future.

The transition towards sustainable infrastructure and renewable energy is a tailwind for BAM, driving increasing investor interest and capital flows.

Competitive Landscape

  • Intense Competition: The alternative asset management space is highly competitive, with several established players vying for investor capital. This includes companies like Blackstone, Apollo, and other private equity firms.
  • Brand Recognition: Although brand doesn’t play as big a role as it does in the consumer market, BAM has an advantage in that they are well known and have a long and successful track record in asset management. The company is well respected in the space.
  • Fee Pressures: There is a growing pressure on fees, which may limit margin expansion in the future.
  • Global Reach: BAM operates across multiple geographies, which helps them to diversify their assets. However, this also makes the company exposed to macroeconomic headwinds in these various areas, so the company must manage this effectively.

What Makes Brookfield Unique

  • Operating Expertise: BAM does not only own assets, but they are known for running these businesses effectively to extract the most value for shareholders.
  • Global Diversification: Their diversified portfolio spans multiple asset classes and geographies, which makes their revenue streams more stable.
  • Long-Term Focus: They focus on investments in businesses with long-term secular trends, which align their business with the major tailwinds of the economy.
  • Scale: With over $850 billion in AUM, BAM has achieved an extensive scale, which gives them the upper hand in operating assets, acquiring new ones, and accessing new sources of capital.

Moat Analysis

BAM has a narrow moat, supported by several factors.

  • Intangible Assets (Brand and Track Record): BAM has a well-established brand within the alternative asset management sector. Its long history of consistent performance gives it a level of trust and recognition, which are difficult for new entrants to replicate. Their expertise and operating model gives them an edge over their competition.
  • Switching Costs: The cost for institutional investors to switch from one fund manager to another is significant. They have to spend lots of time, money, resources, and effort to change to another service provider, making it hard to switch. BAM also locks in the client into long term commitments, which makes it easier to retain its clients over time.
  • Economies of Scale: As they’re one of the largest in this sector, BAM enjoys scale advantages. They can raise capital more easily, and their expertise allows them to find better deals than smaller competitors can. The bigger their scale, the bigger becomes their competitive advantage.
  • Limited Network Effect: There is a certain level of network effect, since a strong network for potential investors creates positive feedback on each new deal. However, this is not a strong moat, because the network effect is limited to the investors and not to the end customers.

BAM’s moat is also limited by various risks, such as:

  • Fee pressures: There is an increasing pressure on management fees and lower fees will directly impact BAM’s earnings.
  • Competition: The industry is very competitive and a new manager can be successful if it comes with a novel strategy, thereby displacing BAM.
  • Macroeconomic environment: A market downturn or recession could severely affect BAM since it will affect the performance of its assets and investor confidence.
  • Key Person Risk: BAM’s performance is heavily dependent on the skills of its management team. Any departure of key figures could affect their brand reputation and future performance.

Moat Rating: 3/5. While BAM possesses several competitive advantages, the presence of stiff competition and the limitations in their moats makes it a narrow moat, instead of wide.

Risk and Business Resilience

  • Macroeconomic Risks: Economic downturns, interest rate changes, or geopolitical events can significantly affect BAM’s investment performance, as well as its ability to raise capital.
  • Market Fluctuations: Market volatility can cause valuations in their assets to fluctuate, impacting BAM’s earnings and their attractiveness to investors.
  • Regulatory Changes: Changes in regulations, especially those affecting financial institutions, can impose additional burdens on the company, affecting its operational flexibility and profitability.
  • Operational Risks: Operational inefficiencies can happen from time to time, and can affect a company’s performance as well as profitability.
  • Acquisition Risk: If they overpay on an acquisition, the company will not be able to earn the return it was expecting, thereby destroying the business’ value.

BAM’s strong brand name helps it remain profitable, despite having risks like macroeconomic conditions and high competition.

BAM’s resilience depends heavily on its diversified portfolio, operating expertise, long term thinking, and prudent financial management. While they have several risks, their business model is designed for long term resilience.

Financial Analysis

BAM’s financial performance has been consistently positive, driven by its strong AUM growth and performance-based incentives. Here are some key highlights from the latest reporting period:

  • Assets Under Management (AUM): AUM increased by 13% YOY to $825 billion in the latest quarterly result. Growth has largely been driven by a diversified set of strategies, including fundraising in private equity and infrastructure investments.

  • Fee-Related Earnings (FRE): FRE has increased by 17% year over year. This was primarily driven by the increase in fee earning assets. This is how much money they earned after adjusting for non cash accounting charges.

  • Operating Expenses: The company’s operating expenses have increased, partially because of its large increase in assets and also due to inflation. They have not shown how their costs are split, between fixed and variable. But with more operational control, they can cut costs to increase profitability.

  • Liquidity: The company has a great liquidity position, being able to weather any potential headwinds in the future.

  • Financial position: Although leverage has increased over the years, the company is able to manage its liabilities in a good manner. Therefore, they have a solid financial position and credit ratings.

    • Debt-to-Equity Ratio: The debt-to-equity ratio of the company is around 0.56, indicating that they use a moderate level of leverage. Since they operate in assets that are safe, their credit ratings remains stable. The debt-to-equity ratio has been decreasing over time and has stabilized in the 0.50-0.60 range.

The company has increased its debt load a fair bit over the years. The interest payments are significantly higher than the cash they earned. It might take some time to make up these amounts.

  • Dividend: BAM has recently increased its dividends, demonstrating confidence and a commitment towards shareholder value.

Understandability Rating: 4/5

Brookfield’s business model, while somewhat complex, can be easily understood with a little bit of explanation.

  • The business model revolves around managing and operating real assets, generating revenue through management fees and performance incentives.
  • Their diversified approach and global reach may make it harder to understand the whole company, though they do disclose some segment details.
  • The concept of having a moat comes from their operating expertise, intangible assets and scale, which are relatively easy to understand by investors.

Balance Sheet Health: 4/5

BAM has a solid balance sheet, with good liquidity, but some concerns regarding high debt and potential for economic downturns to impact operations.

  • The leverage is under control and has been reducing YoY, and the company’s investments in multiple different businesses make it less likely to be exposed to specific risks.
  • The company has a high amount of intangible assets and goodwill. This is not a concerning factor for BAM due to its robust performance, but should be watched over time.
  • The company does not provide details on how the investments are doing, but it is unlikely that they are doing poorly. Overall the debt and asset balance is within manageable boundaries.

BAM’s balance sheet is strong, but it has high leverage and may be affected more by fluctuations in the overall market. Therefore it doesn’t deserve a perfect score.

Recent Concerns and Controversies

  • Impact of Rising Interest Rates: Rising interest rates could affect both the company’s asset valuations and borrowing costs. They have been dealing with it by reducing debt and reducing the duration of the debts.
  • Inflation: High inflation is a concern for the entire business sector, and management has focused on increasing prices to help protect margins.
  • Geopolitical Risks: As a global business, BAM has many assets around the globe and can be negatively affected by any disruptions. They are managing this by diversifying geographically and maintaining good relations with their partners.
  • Management Compensation: There were some concerns with the management compensation last year, but they have made changes to address it.

Summary

Brookfield Asset Management is a leading alternative asset manager, well poised to benefit from long-term growth opportunities. While it possesses some moat characteristics, these are not impenetrable and the business still needs to carefully manage its costs and operations to generate consistent value.