Brookfield Corporation

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 2/5

Brookfield Corporation is a global alternative asset manager focused on real assets and renewable power, with a diverse portfolio spanning infrastructure, real estate, and private equity.

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 and Revenue Distribution Brookfield Corporation (BN) is a globally diversified alternative asset manager with a long history of building businesses across various sectors. BN operates within the alternative asset management space and doesn’t have typical revenue drivers for a traditional company, thus making it a fairly complex business model to analyze. Key aspects to understand about the firm:

  • Asset Management: BN raises capital from institutional and retail clients to be invested in a range of real asset strategies such as infrastructure, real estate, renewable power, private equity, and credit.
  • Operating Businesses: Besides asset management, Brookfield also owns and operates a wide range of businesses in different sectors.
  • Fundraising: The amount of new money raised from clients is a key driver of growth. Fees are based on AUM as well as performance fees for strong performance.
  • Long-term Orientation: It is important to know, both for BN and it’s stock, that it’s a long-term focused business. It will take time before new projects become profitable and be properly valued in the stock.
  • Fee-Bearing Capital: The company reports both fee-earning capital and fee-bearing capital. The latter is the amount of capital on which the company charges asset-management fees, so it is most important to follow.

Recent Changes and Developments:

  • Brookfield has been working toward achieving an asset-light model by selling down some mature assets and moving towards a more fee-based business model.
  • The company has recently been focused on capitalizing on its fundraising efforts, raising substantial amounts of capital and deploying the funds into their businesses.
  • They are heavily investing in renewable energy and data centers, positioning itself for the changing times and opportunities in the future.

Revenue Streams

  • Asset Management Fees: Management fees earned based on AUM (assets under management).
  • Performance Fees: Incentive fees earned when funds outperform benchmarks.
  • Carried Interest: A share of the profits from successful investments that is generally paid when the investment is sold.
  • Direct Income: From the ownership of its operating businesses.

Trends in the Industry:

  • Shift to Alternative Assets: Investors are increasingly allocating capital to alternative asset classes, which represents a large positive trend for BN.
  • Focus on ESG: Companies that can show a dedication to environmental, social and corporate governance have more favorable outcomes from regulatory scrutiny and will be increasingly favored in the future. Renewable energy is a very popular investment destination for many institutional investors and private equity funds.
  • Competition is Increasing: As the popularity of investing in alternative asset classes increases, new and established players are all fighting for capital.
  • Increased Complexity and Specialization: This increases demand for sophisticated alternative asset managers and thus favors companies like BN who have proven themselves for decades and have built an organization that spans across many business sectors and many geographies.
  • Greater Emphasis on Risk Management: As markets become more volatile and complex, sophisticated analysis of risk management will become more important.

Margins and Competitive Landscape

  • The margins on asset management are normally quite high since they require relatively low amounts of operating expenses. The returns on capital of investment firms will likely be a better reflection of performance as compared to the margins.
  • However, the margins in its operating businesses will fluctuate and will depend on each business and its specific characteristics. The company has had quite varied profitability in it’s businesses.
  • Brookfield faces competition from other large alternative asset managers, boutique investment firms, and large corporations investing in infrastructure, real estate, and renewable power.
  • There are few companies that are comparable to BN due to their scale, diversity and expertise. This can give them a significant advantage compared to newcomers.

What Makes Brookfield Different?

  • Scale and Diversity: Brookfield’s massive scale and broad portfolio across various sectors and geographies provide a unique offering not easy to replicate.
  • Long-term Focus: It has a long-term investment horizon and management’s focus is on creating value over the long term and not short-term trading profits.
  • Operational Expertise: It has substantial expertise in operating complex real-asset businesses, which gives it an ability to extract value.
  • Global Reach: It’s operations and fundraising capabilities spans globally.
  • History of Success: The track record in generating profits and growing through the different cycles gives investors more confidence in the management team.

Financial Overview (Based on Most Recent Filings and Calls)

  • Profitability: Profitability has been very volatile for BN, due to the fact that its net income is dependent on non-recurring, hard-to-predict events, such as valuation gains of assets. It’s better to focus on metrics such as FFO and revenue in assessing profitability.
  • Fundraising: The company is aggressively and successfully fundraising in the past few years, which will be key to its future growth.
  • Net Income: For 2023, BN had a net income of $4.21 Billion, significantly helped by gains from asset sales. This represents an extremely volatile number that doesn’t fully reflect the long term performance of the business.

  • Funds from Operations (FFO): For 2023, the company had Funds from operations of $6.6 billion, demonstrating the strength of its underlying businesses. FFO is a way better metric to measure performance since it removes non-recurring items. FFO was significantly helped by an increase in asset management fees due to a higher AUM.

  • Asset Growth: Fee-earning capital is at $464 Billion, which is a testament to its fundraising strength. Total assets at a whopping $881 Billion are not directly useful to evaluating the business because many assets are not fully owned, only partly.
  • Debt: A key element to monitor is debt, especially long-term debt, which at $109 Billion is significant. The company’s net debt-to-capitalization ratio was above management’s targeted level of 30%, but is actively being brought down. Interest rates do have an impact on BN, which has a large debt pile, but as it switches to mostly fixed rates, the company is becoming less sensitive to rate fluctuations.
  • Liquidity: The company is committed to maintaining liquidity of at least $20 billion.
  • Capital Allocation: BN wants to move to an asset-light business by selling down more mature assets and reinvesting in higher-growth ventures. It wants to reduce capital spending to 25 percent of invested capital, which has already been reduced to 27 percent by year-end 2023. The management believes this shows more financial discipline.

Moat Assessment

  • Moat Rating: 3/5
  • Justification: Brookfield possesses a narrow moat. This is due to several factors:
    • Strong market position in large asset management.
    • Specialized operational expertise in a wide variety of sectors.
    • Long-term relationships with its clients.
  • However, these strengths are partially offset by the increasing competition and the volatile and unpredictable nature of some of its operating businesses.

Legitimate Risks to the Moat and Business Resilience

  • Interest Rate Increases: As the company is a big borrower, an increase in interest rates is likely to reduce profit and affect the value of its assets. This can negatively impact the company’s results. However, management are moving towards a position of mostly fixed-rate debt.
  • Increased Competition: If competition increases too much, fees might go down, and the ability of the firm to raise new money will diminish.
  • Economic Downturn: A severe economic downturn might impact the value of real assets and reduce the amounts of capital that investors are willing to commit.
  • Regulatory changes : Because most of its operations are regulated (energy, real estate) the business is highly susceptible to regulatory changes.
  • Global crises: The company has a huge portfolio which makes it very susceptible to local and global crises like recessions, pandemics, and geopolitical strife.
  • Poor investment decisions: One bad investment can wipe out all the good profits the company generates through smart and efficient resource allocation.
  • Difficulty Selling Assets at Good Prices: The company is dependent on selling its mature assets at a good price to move towards an asset-light model. If it cannot sell at appropriate prices, then it might negatively impact the financial position.
  • Execution Risk: Given the amount of acquisitions and projects the company juggles each year, the possibility of things going wrong (or a bad acquisition) always exists.
  • Reliance on a small number of top managers: The company is very dependent on the skill and competence of its top managers. If any key leader is lost, that might materially affect the business.
  • Loss of investor confidence: Loss of investor confidence may impair the company’s access to capital and depress its share price.
  • Currency Fluctuations: The company’s global operations expose it to the impact of currency fluctuations, which may affect its revenue and expenses.

Understandability Rating:

  • Rating: 4 / 5
  • Justification: The company is not too simple to understand, it’s an alternative asset manager, which is not an easy sector to grasp. However, due to its size, history, and the very detailed information provided in its annual reports, with a little effort one can get a good grasp on the underlying business. Some understanding of alternative asset management and investment is required to truly understand BN and its long-term goals.

Balance Sheet Health Rating:

  • Rating: 2 / 5
  • Justification: While the company is not in a terrible financial condition, its level of debt is still somewhat worrying. For that reason, a 2 out of 5 rating is the most appropriate rating for now. It is true that they are actively trying to lower their debt, but that has to be monitored in the upcoming years to ensure that the trend remains intact.
    • High debt levels are a constant concern.
    • A large percentage of assets consists of intangibles, which are less liquid.
    • It has ample cash on hand to weather short-term financial difficulties.

Recent Concerns/Controversies and Management Response:

  • Debt Level: The company has been actively working on decreasing debt levels, but have stressed the importance of long-term funding that should be secured well into the future.
  • Volatility: The earnings are very volatile, but this is something that is expected by management, and the real measure of its performance, according to management, lies in long-term trends, AUM increases, and the quality of the assets they hold.
  • Acquisitions: The company continues to seek acquisitions to spur growth but management has to be very careful to identify and execute accretive mergers and acquisitions. They are very conscious to only pursue transactions that increase its intrinsic value.
  • Long-term nature: They emphasize that their current strategy of restructuring towards an asset-light model and increased focus on recurring revenues and performance based metrics will take time to properly be reflected in the books.
  • Management Compensation: Management has consistently shown its intention to act in the best interests of shareholders, however, a few things on the compensation front should be monitored to ensure that it does not lead to conflict-of-interest issues.

Conclusion Brookfield Corporation is a complex business model with great long-term prospects and a fairly experienced management team. However, the amount of leverage and the volatile performance of the business make it a business worth watching closely. It is clear from management’s communication that it’s a company with a long term focus, and therefore the business should be evaluated by those who are looking to invest over a longer period.