Mission Statement from Brookfield Business Partners

Mission Statement from Brookfield Business Partners

A good example of how the management team at Brookfield communicate their investment philosophy to their stackholders... 

Our Mission

Our overall objective remains the same as when we created BBU in 2016; to deliver an attractive long-term risk-adjusted return to unit-holders, primarily through capital appreciation. Our goal is to acquire and manage businesses with high barriers to entry, low production costs and the potential to benefit from Brookfield’s global expertise as an owner and operator of real assets. We create value at BBU by buying businesses at reasonable values relative to their cash flow potential, and then work to enhance their operating cash flows.

A key advantage of our business model is that we have the flexibility to invest in any form. This means we can acquire businesses outright, make loans to them or acquire debt and equity securities in businesses when they become mispriced.

A consequence of our strategy is that we may not acquire businesses that generate consistent cash flows, and certain of our businesses may generate weak or even negative earnings at the outset but have the potential to generate substantial gains in the longer term. For this reason, our cash flow and earnings may, sometimes, be volatile but the overall intrinsic value of our business should increase over time.

Intrinsic Value

Our objective is to acquire businesses at a discount to ‘intrinsic value’, which we define as the present value of cash flows that a business will generate in the future. This is generally possible when we take a contrarian approach to investing, meaning that our view of a business’ future is more favorable than what others may think. We believe that, in certain circumstances, our knowledge base enables us to make such judgements.

From time-to-time publicly traded securities, both equity and debt, trade at discounts to the intrinsic value of their underlying businesses. As capital markets have been robust for some time we have found few such opportunities, but will be prepared to act should they arise. Toward the end of 2018 public company share valuations declined meaningfully, and as a result the Dow Jones Industrial Average and S&P 500 index were down approximately 20% peak-to-trough in 2018. We have not been immune to the recent market volatility and experienced a reduction in our unit price. Our approach to intrinsic value for BBU considers both the current value of our existing businesses, plus the growth in value we are likely to achieve through capital recycling, meaning the reinvestment of proceeds from mature businesses into new opportunities. We believe our recent capital recycling initiatives have meaningfully increased the intrinsic value of our business, which will be evidenced, in part, by substantial growth in FFO per unit over the coming year.

Towards the end of the year the discount between the trading price of our units and our view of value of the business was so substantial that, notwithstanding the many opportunities available to us, purchasing our units became a compelling opportunity. We have been buying back BBU units which, at recent price levels, presents a very attractive use of capital.

As we look forward, while we are conscious of short-term unit price performance, our focus is on building long term intrinsic value for our unitholders.

Capital Structure and Leverage

Our approach to financial risk management is designed to protect our overall business during challenging circumstances, maximize flexibility across our activities and utilize leverage prudently to enhance the returns we earn on our invested capital.

We do this by (a) maintaining substantial liquidity at the parent company level; (b) ensuring that each of our businesses is financed without recourse to BBU or other businesses, so that we are never forced to support a business that is impaired (although we may choose to); and (c) utilizing debt prudently at the operating company level, at the time a business is acquired and throughout the period we own it.

At the operating company level, we seek to borrow longer dated debt, with maturities at least five years out, and at levels of debt service that the business can readily sustain. Our goal is to have limited or ideally no financial maintenance covenants, so that in the event a business experiences a reduction in earnings we aren’t forced to repay its debt. In some cases, it may be appropriate to increase debt if a business is a stable, cash flow generating operation, while other businesses may require a reduction in indebtedness. Our investments provide examples of both scenarios.

Brookfield Business Partners,
Excerpt from Q4 2018 Letter to Shareholders