Brookfield Asset Management…Q3, 2019…Letter to
Shareholders
I own Brookfield’s parent company and all four of
their limited partnerships. In total these five equities make up 60 percent of
my overall investment portfolio. They have been fabulous investments. I have
learned so much over the years reading Bruce Flatt’s quarterly letter to the
shareholders. They are simply put, the gold standard in communicating
information to investors and have spoiled me as I expect all companies
I’m interested in to communicate in the same fashion.
Overview
During the third quarter, markets were positive, liquidity
was strong, and most of our businesses performed on plan. We moved forward on
numerous strategic initiatives, advanced fundraising, closed our Oaktree
transaction, and continued to invest capital.
The backdrop for investing capital into alternative assets
continues to be very favorable, and the long-term trend appears to be even
stronger. We continue to strengthen our position as a leading global alternative
asset manager, enabling our investors to benefit from our scale, global reach
and operating expertise.
Total assets under management now exceed $500 billion, and
our total capital available for new investments increased to ±$65 billion. We
are actively adding capital in virtually all areas across the business and
while we are cautious about overall market conditions, we continue to find
attractive opportunities to put capital to work.
Market Environment
The global business environment continues to be a tale of
two cities. Business fundamentals in most markets are still good: slower than
2018, but still very constructive. On the other hand, politics dominate the
headlines and continue to unsettle investors. Looking longer term, however, these conditions in themselves are
creating opportunity for investors like us who have on-the-ground intelligence
and can therefore differentiate between headline news, and news that actually
affects business fundamentals.
Interest rates continued to settle back in at historic lows,
with the potential for them to go even lower when a global slowdown occurs.
With interest rates in Japan and Europe now negative for all maturities, we
seem to be in a new phase with global rates in the range of –2% to +2% for the
next five to seven years. This is
particularly relevant for us and will positively impact on all asset values and
businesses that generate cash.
Should this interest rate environment continue to prevail,
and with institutional capital growing, we expect that capital will
increasingly be allocated to alternatives. We think that institutional
investors will continue a push towards 60% alternatives allocation in their
portfolios—from a global estimate of 25% today.
Performance in the Quarter
Our asset management operations generated strong results as
a result of both significant fundraising over the last twelve months and the
increase in unit prices across our listed partnerships. Fee related earnings
before performance fees increased 35% over the prior year quarter; and this
excludes Oaktree’s fee related earnings as the acquisition closed at quarter
end. In total, annualized fees and carried interest are now $5.4
billion—including annualized fee revenues of $2.8 billion, and annualized
target carried interest of $2.6 billion.
Our income over the last twelve months included $595 million
of realized carried interest before costs, including $59 million in the current
quarter from capital returned within our first flagship real estate fund. We expect continued realizations within
this fund in the fourth quarter of 2019 and in the first half of 2020, as we
sell the remaining investments and return capital to investors. As a result
of our normal course fundraising and the Oaktree acquisition, total assets under management are over $500
billion, and we continue to raise and deploy additional capital across our
businesses.
We raised $2 billion of private fund capital in the quarter,
bringing the total third-party capital raised over the last twelve months to
just short of $30 billion. This included $19 billion of fee bearing capital
across our latest round of flagship fundraising, $3 billion in our long-life
fund strategies, and $6 billion in other funds and co-investments. We also
added $102 billion of private fund fee bearing capital as a result of the
closing of Oaktree. Together with
Oaktree, we now have ±$275 billion of total fee bearing capital, and our
private fund investor base includes over 1,800 investors.
Subsequent to quarter end, we completed the final close of
our fifth private equity flagship fund, raising $9 billion. We expect our
latest flagship infrastructure fund to hold its final close by the end of 2019
or early in 2020, bringing to completion the latest round of flagship
fundraising. Together with co-investment capital raised to date, this round of
flagship fundraising will total approximately $50 billion. More importantly, with the growth of our strategies and our expanded
credit franchise, we expect the next round of fundraising for our flagship
funds to be ±$100 billion. Our latest flagship real estate, infrastructure
and private equity funds are approximately 45% invested in aggregate, and we
therefore anticipate that we will be back in the markets with our flagships in
2021/2022.
Our investment
partnerships also continue to grow. Our listed partnerships have seen combined
growth in their funds from operations (“FFO”) over the last twelve months of
more than 13%. This growth came from strong transportation volumes and
expansion projects within our infrastructure business, strong wind pricing
within our renewable business, margin improvement within a number of our
private equity businesses, and leasing and new developments coming online
within our real estate business. We have deployed $33 billion of capital across
our funds and listed partnerships over the last twelve months and expect to see
this contribute to further growth in our
invested capital and FFO going forward.
Investor Day
During the quarter we hosted our annual Investor Day at Brookfield Place in
Manhattan. The
event was webcast live and the materials are posted on our website. A quick
summary is as follows:
Brookfield Asset Management’s outlook is strong; global interest rates
appear likely to stay low for a while, causing institutional investors to
allocate larger amounts of their capital to alternatives. Alternatives are therefore no longer ‘alternative,’ but rather
mainstream, and we think they could reach a percentage of 60% of institutional
funds in the next 10 years. In addition, asset values in this environment
are increasing, as recourse only
borrowing is cheaper, leveraged equity returns are higher, and investors’
choices are fewer. Our next round of funds, including credit, should reach
$100 billion, and all of this positions us well for the coming several years.
As our cash generation continues to grow, we will need to decide if, when, and
how to return capital to shareholders.
Brookfield Property Partners
has transformed itself over the past five years since its spin-off from BAM. In
addition, NAV and cash flows have grown at a compound ±10% annually. For various reasons, similar to most real
estate securities, this is not reflected (yet) in the stock price, enabling a
buyer today to make an investment at an estimated 35% discount to the appraised
IFRS value of its underlying assets and a going-in yield of over 6%. This
is almost unprecedented for the quality of portfolio that this entity owns. As
a result, BPY has been repurchasing units with extra cash while adding value
through completion of its significant development program. The opportunities to redevelop retail centers into office, residential,
hotel, and other uses are expected to continue for many years, and we have some
incredible office projects coming online in the next few quarters. This
should enable cash flows to grow at 7% to 9%, and NAV to compound at ±15% for
years. At today’s trading price, this is a great opportunity to own this
business at a 35% margin of safety to IFRS value.
Brookfield Infrastructure
Partners owns one of the highest quality, most diverse group of
utility assets globally. In the 13 years since its spin-off, we have compounded
the returns to investors at an annualized 18%. Going forward, with the critical mass to set us apart from most others,
we believe we can continue to operate our assets well, dispose of mature ones,
and acquire new ones opportunistically to drive 6% to 9% annual cash flow
growth. In conjunction with a growing cash distribution, this should drive 12-15% in annualized
returns to investors looking forward. These assets are the backbone of the
global economy, many of which will continue to exist 100 years from now.
Brookfield Renewable Partners
is one of the largest privately-owned renewable energy entities in the world
and has produced a 16% annualized compound return over the past 20 years. We believe that the renewables industry is
at an inflection point: wind and solar are now profitable without subsidies,
and the push for decarbonization of the electricity grid is substantial. We
believe we can continue to grow our cash flows at 5% to 9%—and with the cash distribution, this generates an all-in return to
investors of ±15%. In addition, owning one of the largest renewable
businesses ensures that we are on the right side of one of the dominant trends
in the global economy today.
Brookfield Business Partners
has now reached a critical mass and has acquired some exceptional businesses
since its launch. An investor in this entity participates in all the private equity
strategies in which we invest for our private clients. Recently we added Clarios, the largest battery provider to the
automotive industry; Westinghouse, the leading infrastructure services provider
to the nuclear industry; and Healthscope, a leader in private hospitals in Australia. We
also sold a facilities management company and an industrial mining business for
substantial gains. This entity is focused on achieving NAV growth of ±15% on an
annualized basis over time, with substantial upside to the NAV if we
successfully execute our plans for these exciting businesses.
Oaktree
We completed the acquisition of approximately 61% of
Oaktree, with the balance continuing to be owned by the current and former
management partners. This is a very exciting partnership for us, and Oaktree
continues to deploy capital into all of their primarily credit strategies, as
well as raise capital for successor funds or adjacent strategies. In addition
to this, we are working to help them scale up some of their strategies and are
considering where we can jointly provide products to our clients.
We are thrilled to also benefit from the world-class
expertise of the Oaktree team. Oaktree
is the premier global credit franchise, and we intend to utilize this expertise
to make us better investors in everything we do. This should enhance our
ability to engage with our clients in more ways and help them achieve their
investment objectives in a more responsive and all-encompassing fashion. It is
still early days, but we are pleased by our progress to date.
Longer term, Oaktree
will also help us prepare for the inevitable downturn in the markets. We
are positioning ourselves to put our resources behind the Oaktree franchise to
allow it to excel even more when, inevitably, the market turns.
Data Infrastructure
Over the last few years, we have focused on growing our data
infrastructure business. Data has been
one of the fastest growing commodities in the world, and we expect this to
continue for the foreseeable future. This is being driven by several
factors, including greater smartphone penetration, increasing video
consumption, and the advent of 5G networks. It is also driven by more connected
devices everywhere, greater use of artificial intelligence, and other
applications that are being developed every day.
We believe strongly that as people, places and objects
become increasingly interconnected, the importance and value of data
infrastructure assets will continue to grow. Given the ongoing evolution and innovation taking place in the telecom
sector, we are looking to partner with telecom owners by investing in and
leasing back their infrastructure. The other factor that is helpful to this
trend is that the capital required to build out this data infrastructure is far
greater than the capital the traditional telecom owners typically have access
to within their own financial resources.
We own the leading independent telecom tower operator in France, with
over 7,000 towers and active rooftop sites. More recently, we secured an
exclusive agreement to invest into one of the largest privately-owned tower
businesses in the world—130,000 telecom towers that support Reliance Jio in India.
We have also been acquiring and building out fiber networks. Our U.K. regulated distribution business
is deploying fiber-to-the-home networks in new housing developments as part of
its multi-utility offering in response to customer demand for faster and more
reliable broadband solutions. Meanwhile, our
French telecommunications infrastructure business is rolling out four fiber
networks to connect over 700,000 households in the next few years as part of
the French government’s national broadband plan, and in New
Zealand we are deploying 5G technology
on our networks.
Lastly, we have been active in acquiring data centers, and
now own businesses on three continents. We
own a U.S.
business that deals with large, blue-chip enterprise customers and the U.S.
Federal Government, having acquired it
as a carve-out from a major telecommunications company. In South America and Asia-Pacific, where cloud computing
is at an earlier stage of adoption, we are building major cloud data centers
that are leased to the global technology giants.
We think data infrastructure is an exciting area for us, and
that it has many decades of growth ahead.
Global Urbanization
By 2050, another two billion people will move into cities
globally. A great percentage of these are in emerging countries, but the past
20 years has seen increasing intensification in every large city in the world. This trend affects many businesses in our
portfolio—including our office space, residential high-rise, and a number of
our infrastructure businesses.
Office space globally has never been more fully occupied. Supply
has been relatively constrained in most places, and due to residential demand
in cities, many sites that would have been built as office were instead
converted to residential use. More importantly, though, many companies that
used to move to campuses in the suburbs are moving back into the city. This is
for one simple reason: people, old and
young, want to enjoy the vibrancy of a great city. As a small example,
because of this phenomena, Sydney and Toronto have virtually
zero percent commercial vacancy today. Very seldom does this happen in any
major city.
Residential high-rise condominiums (owned by individuals) or
apartments (multiple units owned by large investors and rented to individuals)
have also increased in scale and value in all major cities. This started because young employees could
live relatively inexpensively and close to their offices. Further, due to
the success and the buildout of amenities (restaurants, bars, gyms) to service
these young residents, older, wealthier people started moving into the city.
Instead of downsizing to a small house and living in the suburbs, the empty
nesters are now moving to the vibrancy of the cities, with all of their
benefits—such as museums, galleries, sports arenas, theatres and concert halls.
This trend is accelerating and making cities
better, and land and apartments are increasingly valuable.
Within our infrastructure business, these factors are
leading to increased opportunities for us. Our district cooling and heating
business (an outsourced provider to a property) is a beneficiary of increased
demand for and subsequent construction of properties. The combination of two mega-trends—environmental sustainability and
urbanization—is at the heart of a number of our infrastructure businesses
and should enable substantial growth for us in the coming years.
Operating Standards
Recently, the Business Roundtable came out with what they
deem to be new standards on how business should conduct itself. We thought it
worthwhile to share our views on this with you. Our basic starting point has always been that to sustain a business
over the longer term, one must operate with high governance standards, respect
the environment, and operate in a socially responsible manner.
As a result, we have always aimed to operate with strong
governance standards in every country in which we operate. This is an expectation that, once understood across an organization,
ensures employees “know how to act.” With respect to governance, as a
fiduciary, we hold ourselves to very high standards. We have significant
responsibilities to our stakeholders, including pensioners, countries,
governments, investors, and employees. That does not mean we don’t face
difficult decisions from time to time;
it does, however, mean that we strive always to act with integrity and to be
transparent about how we solve each situation.
We believe that being
environmentally conscious is a requirement as a successful long-term investor,
and our investments demonstrate this. Over the last few decades, we have
assembled one of the largest privately-owned portfolio of renewable power
facilities globally. We own ±$50 billion of hydro, wind and solar facilities—enough renewable power to serve the
combined needs of Ireland
and Denmark
on an annual basis. In real estate, we have one of the largest portfolios
of properties globally, a large percentage of which meet the highest standard
of environmentally positive working environments. Our global tenants, many of
whom are leading international companies, have been demanding this for decades,
and we have worked with them for many years to ensure that we meet their
advancing needs and expectations.
With respect to social responsibility, we believe in
supporting the communities in which we operate. Our expertise in turnarounds means that we often save companies from
liquidation—and in many cases, reinvigorate communities as a result. In
infrastructure, for example, the companies we own deliver critical services to
tens of millions of people around the world. One of these, BRK Ambiental, provides water distribution and wastewater
treatment for 15 million people in Brazil, a country that still
struggles to deliver these services. As another example, last year we
purchased Westinghouse from bankruptcy and have now turned it into a healthy
global leader in the servicing of the power industry. As we grow these businesses, we are providing critical services, as
well as earning solid returns for our investors.
Closing
We remain committed to being a world-class alternative asset
manager, and to investing capital for you and our investment partners in high-quality assets that earn solid cash
returns on equity, while emphasizing downside protection for the capital
employed. The primary objective of the company continues to be generating
increased cash flows on a per share basis and, as a result, rising intrinsic value per share over the
longer term. Please do not hesitate to contact any of us should you have
suggestions, questions, comments, or ideas you wish to share with us.
Sincerely,
J. Bruce Flatt,
Chief Executive Officer,
November 14, 2019
