Stocks/International

Lyn Alden Schwartzer

Filtering Through the Noise to Find Value

Brookfield Asset Management is an Attractively-Priced Powerhouse

It was announced last week that Brookfield Asset Management (BAM) is acquiring all of the public stock of Oaktree Capital Group (OAK). Additionally, the co-founder of Oaktree, Howard Marks, will be joining Brookfield’s board of directors.

Both of these firms are alternative asset managers. Oaktree specializes in distressed debt and other credit opportunities, while Brookfield is highly diverse but has mainly focused on equity investing in real estate, infrastructure, and renewable energy with a worldwide footprint.

Brookfield is getting a bargain with this acquisition in my opinion. Many Oaktree shareholders are understandably not thrilled with the modest 12.4% premium offered for the buyout, considering that Oaktree stock was significantly higher 4-5 years ago. However, the deal is almost for certain to go through because Oaktree insiders have such a big stake of voting rights and will be voting for the deal. Brookfield is taking Oaktree private while it is rather cheap, in other words.

Brookfield has been incredibly successful at generating shareholder value over the past two decades. The company began as a real estate and infrastructure developer with Canadian and Brazilian assets, but has now become one of the biggest alternative asset managers in the world with an asset footprint stretching over five continents.

Under their long-tenured CEO Bruce Flatt, the company has built out a really advantaged structure over the past two decades. Brookfield makes money from directly investing its own capital into projects, and then also operates a variety of private funds so that institutions can invest alongside them. Their funds have been very successful with strong performance for the investors and great fees for the company. Additionally, they have created four publicly traded partnerships, and all of them pay a management fee and incentive distribution rights to the parent company, and the parent company also owns a big equity stake in all of them to receive growing cash distributions. One of these partnerships specializes in infrastructure, one specializes in real estate, one specializes in renewable energy, and one specializes in general private equity.

About 20% of Brookfield is owned by insiders, and the company has a strong history of good management transition and great board oversight. This is a company that plays chess over years rather than checkers over quarters, and the results speak for themselves: 

Yet, Still Under the Radar

Brookfield stock doesn’t have a ton of liquidity relative to its size for a few reasons. For one, it’s a Canadian firm, and thus outside of the popular S&P 500. Secondly, the complicated structure makes it very difficult to analyze.

I’ve been following and investing in the Brookfield family of entities since 2010 and believe the parent company Brookfield Asset Management remains a good long-term buy at today’s prices despite a long period of outperformance. Due to their focus on hard assets, I find focusing on their EBITDA multiple to be the most helpful metric:

If we have a global slowdown or recession, BAM stock will likely trade lower, but fundamentally they directly benefit from times of economic stress due to their contrarian and counter-cyclical investing approach.

During the global financial crisis in 2008, they bought a huge set of global infrastructure from a struggling company, Babcock & Brown, and enjoyed the improving cash flows as the global economy recovered.

When Brazil ran into a huge recession during 2014-2017, Brookfield acquired all sorts of gas pipelines and toll roads from distressed sellers that needed to raise capital, and locked in long-term favorable pricing contracts indexed to inflation.

After solar developer SunEdison collapsed into bankruptcy from too much debt to fuel overly-aggressive growth plans, Brookfield swooped in and bought lots of attractively-priced solar and wind farms from them.

Brookfield specializes in buying high-quality assets from distressed sellers (usually due to too much debt), and then using their strong financial position to re-finance that debt at much better rates, improve the assets over time, and then sell the assets years later at the top of a business cycle.

Oaktree is a good fit because they do the same contrarian counter-cyclical investing approach with credit, and will enhance Brookfield’s credit capabilities. Oaktree traditionally gets more defensive during periods of strong economic growth and high asset prices, and gets more aggressive during periods of distress where bargains can be found.

Looking back five or ten years from now there’s a high probability in my view that Brookfield Asset Management will outperform the S&P 500 from today’s price point. Thus, I am long BAM as a core position.

Lyn Alden Schwartzer covers North American stocks and international equity ETFs with a focus on fundamental valuation. Her background is a blend of engineering and finance, and she uses a dispassionate long-term quantitative and qualitative approach to filter through the noise and find value in stocks and markets around the world.
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