What is Brookfield Asset Management?
Brookfield Asset Management is a global alternative assets investor with over $600 billion of assets under management. This post will describe the company’s history, ownership structure, and business prospects.
History
The history of Brookfield Asset Management is long and complicated. Since Brookfield is the successor to a wide range of different companies, their history begins at various points. Some of those points reaching as far back as railway entrepreneur William Mackenzie during the early 1900s.
The modern story of Brookfield begins in 1959, when Edward & Peter Bronfman created Edper Investments with $15 million following the sale of their share of Seagrams. Edper acquired Brazilian electric generation & distribution businesses and subsequently named this holding company “Brascan” (a portmanteau of “Brazil” and “Canada”).
During the following three decades, until the 1990s, Brascan grew through a series of combinations and cross shareholdings with public and private companies. Brascan’s investments became a diversified portfolio of businesses ranging from real estate, to resources, to financial services. The main architect of Brascan during this time was Jack Cockwell.
Brookfield Asset Management Emerges
By the early 1990s, Brascan was exposed to the downturn in real estate with rising interest rates and its connection to the fall of Olympia & York. This forced Brascan to sell some large assets to deleverage and for the Bronfmans to end their involvement with the company.
Through the late 1990s, Brascan simplified its corporate structure and focused its portfolio around a few main themes. By 1995, the ownership structure of the Brookfield we know today was in place. A much more focused Brascan was laying the foundation for future growth.
In 2005, Brascan changed its name to Brookfield Asset Management and re-positioned its strategy under new CEO Bruce Flatt. Brookfield’s focus shifted from managing its own portfolio exclusively to also earning management fees from the investments of clients. Today, Brookfield’s earnings come partially from its own investments and partially from the fees earned from clients.
Ownership Structure
Brookfield Asset Management has two classes of shares. Class A shares are traded on public exchanges. These shares give owners the right to vote for half the board of directors. Class B shares are owned entirely by insiders and give those owners the right to vote for the other half of directors.
The ownership structure of Brookfield is even more complicated. But the basic idea is that the managers of Brookfield, called “partners”, are the stewards of the class B shares and commit to investing a substantial portion of their net worth in class A shares as well. Brookfield believes this creates stability and will reward partners committed to growing the business.
Essentially, there are about 50 “partners” who are former and current managers of Brookfield. They in turn own all the outstanding class B shares through a company called Partners Ltd which is partly governed by what is known as the “BAM Partnership”. Control of Brookfield’s class B shares gives the “partners” the right to elect half the board of directors. From this control position, the partners can guide the direction of Brookfield without having to hold a majority economic interest.
Over the years, the Partners have accumulated a large economic stake in Brookfield as well. The Partners collectively own interests in approximately 320 million Class A Shares (representing approximately 20% of the Class A Shares on a fully diluted basis). These shares are held either by direct ownership (or through holding companies and foundations) on an individual basis and by the Partners’ proportionate ownership of class A Shares held by Partners Ltd and Partners Value Investments.
Partners Value Investments is a publicly listed mutual fund trust, which is owned 52% by Partners Ltd and 38% by individual Partners themselves. The company itself owns approximately 130 million Class A Shares of Brookfield Corporation.
Partners Value Investments also has a little twist to it. The company is a wholly owned subsidiary of Partners Value Investments which holds most of the class A shares owned by Partners Value Investments. Partners Value Split Corp then issues preferred shares to fund further investments. In addition to owning its class A shares of Brookfield Asset Management, Partners Value Investments also owns a $300 million portfolio of public securities.
To further reinforce the long-term stability in ownership of the Brookfield Asset Management’s class B shares, a group of longstanding senior leaders of the “BAM partnership” have been designated to oversee stewardship of the class B Shares. Under these arrangements, the class B shares are held in a trust (the “BAM Partnership”). The beneficial interests in the BAM Partnership, and the voting interests in its trustee (“BAM Partners”), are held one-third by Jack Cockwell, one-third by Bruce Flatt, and one-third jointly by Brian Kingston, Brian Lawson, Cyrus Madon, Sam Pollock and Sachin Shah in equal parts. As such, no single individual or entity controls the “BAM Partnership”.
In the event of a fundamental disagreement in the BAM Partnership (and until the disagreement is resolved), three individuals have been granted the authority to govern and direct the actions of the BAM Partnership until the disagreement is resolved. The individuals, none of whom are partners, are Marcel Coutu, Frank McKenna and Lord Gus O’Donnell.
Another aspect of the governance of Brookfield to keep in mind is that the voting trust agreement between the “BAM Partnership” and Computershare Trust Company also creates a coattail between the class A and class B shareholders of Brookfield Asset Management in the event of a sale of class B shares.
How Much is it Worth?
How lucrative has the ownership arrangement been for the Brookfield “partners”? Collectively, their ~20% stake in Brookfield class A shares is worth about $20 billion. This amounts to about $400 million per partner. Jack Cockwell’s stake in Brookfield is now worth about $2.5 billion and Bruce Flatt’s stake is worth about $4.5 billion.
Main Lines of Business
In 2022, the market cap of Brookfield Asset Management is about $100 billion. Brookfield manages over $600 billion of assets. Half of which is “permanent capital” represented by publicly listed companies such as Brookfield Infrastructure Partners and Brookfield Renewable Partners. Brookfield now has over 150,000 employees worldwide in over 30 countries.
The profitability of Brookfield is driven by two main factors. To be successful, Brookfield needs to attract new investors and grow fee earning assets under management. The competitors to Brookfield include other private equity firms such as Blackstone, KKR, Apollo, and Onex in Canada. Brookfield has positioned itself as an alternative manager with some unique capabilities. These unique capabilities include offering funds that support the transition to environmental sustainability and a focus on “real assets” such as infrastructure and real estate.
From the $341 billion of fee earning assets under management Brookfield has, 39% is from private equity funds, and 36% is from private credit. The tilt towards private equity and credit is the result of investor demand and the purchase of Oaktree Capital. But this distribution of fees represents a risk for Brookfield because an economic downturn could have a larger impact compared to more defensive sectors such as infrastructure and renewable energy.
Public Securities
Brookfield controls a few public vehicles. Brookfield Infrastructure Partners, Brookfield Renewable Partners, Brookfield Business Partners, and Brookfield Reinsurance Partners are each publicly traded. Investors can buy and sell shares in each of these businesses and Brookfield can use these public vehicles as a source of liquidity and permanent fee earning capital.
Brookfield also has two mutual fund trusts listed on the TSX and a long list of preferred shares outstanding. It would be possible to build an “all Brookfield” investment portfolio with just the investments traded in public markets.
Benefits of structure
There are many benefits to the structure of Brookfield. First, it rewards the managers of Brookfield for their loyalty and success. Brookfield’s former and current managers can control large pools of capital with a minority economic interest. At its current size and ownership structure, Brookfield is largely takeover proof. This creates some stability for shareholders.
Brookfield’s ownership structure also allows it to tap a huge pool of capital. Brookfield can raise capital in many ways including issuing equity in publicly listed subsidiaries and selling their fund offerings to investors. Brookfield gains tremendous scale and diversification for shareholders and clients with its current structure.
Risks of structure
Whose interests are the “partners” of Brookfield really serving? Public investors in Brookfield must have a lot of faith in the integrity of the “partners”. However, over the past few decades, Brookfield’s model has been successful. Brookfield has a reputation of being a world class organization.
Although key person risk is something to consider, the size and diversity of Brookfield’s organization takes away much of this risk. However, we have yet to reach a time when Jack Cockwell is no longer in a leadership position. Although he does not have an active day to day roll in managing Brookfield, he’s still important to overall governance. How Brookfield transitions management following Jack Cockwell’s death will be a key test for the business structure.
Valuation
How do investors evaluate the class A shares of Brookfield Asset Management? The first step is to add up the sum of its parts. Investors can calculate the value of Brookfield based on the assets they own. But another element to valuating Brookfield is to project the earnings potential of the fund management business. The investor’s job would be easier if Brookfield were to spin off their fund management business into a separate public entity. This way, investors could evaluate the fund management business like they would any other fund management company and evaluate the top level of Brookfield like a holding company.
Is Brookfield a Good Investment?
Brookfield Asset Management is one of the largest companies in Canada. In addition to Brookfield Asset Management itself, Brookfield Infrastructure Partners is also part of the TSX/S&P 60 Index. Brookfield is an established dividend paying company with a decades long track record of profitability. Shares of Brookfield Asset Management are suitable Canadian blue-chip stock portfolios.
The main drawback to investing in Brookfield Asset Management class A shares is its complicated multi-class share structure. Brookfield meets a standard of a previous generation of corporate governance but doesn’t align with contemporary corporate governance practices of a single share class so that all shareholders are on equal footing. However, the earnings potential for Brookfield is huge as its positioned as a leader in alternative investments.
Brookfield has also embraced environmental sustainability and is raising funds to support a clean energy transition. This puts Brookfield at the forefront of this investing trend.