Brookfield Asset Management Shareholders, 2nd Quarter
Overview
Results were strong. We generated Fee-Related Earnings (FRE) of $548 million and Distributable Earnings (DE) of $527 million for the second quarter. This brings both our FRE and DE over the last twelve months to $2.2 billion, representing growth of 16% and 14%, respectively, and highlights the stable and predictable nature of our business. This stability is driven in large part by fee-bearing capital that is 85% attributable to long-term or perpetual funding sources.
We have been one of the most active alternative asset managers year-to-date, leaning into our established investing approach and competitive advantages to put meaningful capital to work and monetize assets for our clients. We committed to $50 billion worth of investments, monetized $15 billion of assets, and grew to $850 billion of assets under management.
The current market environment is an attractive one in which to transact, particularly for those with access to capital and financing, and we are currently fundraising for several of our flagship opportunistic strategies, which should prove to be excellent fund vintages. We expect an acceleration in fundraising in the second half of the year as we progress our efforts on the recently launched funds.
This Will Be a Record Year for Fundraising
Investors have become increasingly selective in establishing partnerships with asset managers who can bring them scale funds, co-investments, and deals across asset classes and market conditions. We stand to benefit from this trend because of our size, global operating capabilities, and diversity of investment mandates.
We continue to see increasing demand from investors for real assets across infrastructure, renewables and transition, private equity, opportunistic real estate, and private credit—all areas in which our franchise is strongly positioned. We raised $37 billion of private capital year-to-date and expect our fundraising to accelerate into the second half of the year, with first closes scheduled for two of our flagship funds as well as additional closes for our remaining three flagships and several complementary funds. With these fundraising efforts we expect to reach our target of close to $100 billion of private capital inflows, and when combined with the $50 billion of insurance capital inflows, we are on track to raise a record $150 billion of capital this year.
The most significant fundraising updates to share with you are:
Infrastructure—Fundraising for our infrastructure business continues to be very strong, with longstanding investors continuing to increase their capital commitments with us and new investors making new ones.
The fifth vintage of our flagship infrastructure fund has now raised $27 billion of capital. We still have some fundraising to go before the final close later this year, but irrespective, this is the largest infrastructure draw-down fund ever raised. The third vintage of our infrastructure debt fund has also received strong support from investors. Relative to a prior vintage of $2.7 billion, this fund has now closed on over $4 billion, surpassing our initial target, and we expect a final close of over $5 billion later this year.
In aggregate, we expect to raise over $35 billion of private capital across the current vintages of our four infrastructure funds—and with capital scarce in the market, we believe the opportunity set for these vintages to be robust.
Renewable Power and Transition—Allocations of capital into energy transition are increasing and becoming more established in the mandates of institutional investors around the world. This is a stark contrast to only a few years ago when we started raising capital for Brookfield Global Transition Fund I (BGTF I) and the concept of transition investing was just being introduced. In that environment, we raised the largest first-time committed capital private fund ever and established ourselves as one of the leading transition investors, allowing us to build out a platform and track record with little competition and set ourselves up for future fundraising success.
Fundraising for the second vintage of our flagship transition fund is off to a strong start. While we are still early in the process, we expect strong re-ups and are broadening our reach to a larger group of clients, as investing in the energy transition is now much more accepted in the market. We are also benefiting from the successful deployment track record of BGTF I, giving us confidence that this vintage will be larger than the first.
Credit—In private credit, our marquee Oaktree brand is well placed to benefit from the market uncertainty, scarcity of capital, rising rates and forced selling. The twelfth vintage of our opportunistic credit fund, along with our newly launched private lending strategy, have raised $7 billion of capital to date, and we expect to raise an additional $20 billion in the next 6-12 months. Pullback by traditional lenders is also opening the window for deploying more capital at strong risk-adjusted returns.
Real Estate—We recently launched fundraising for the fifth vintage of our opportunistic real estate fund and expect a first close later this year. Historically, many of the substantial gains in real estate were made during periods of capital scarcity, so we are confident that investors will look to deploy meaningful amounts of capital to opportunistic real estate strategies in order to take advantage of the stress in the market, which is our sweet spot. As the funding markets turn, we expect to be a beneficiary.
Private Wealth—Our private wealth business (Brookfield Oaktree Wealth Solutions) continues to gain strength as we package and design investment products for distribution into this channel. Over the past two years, we have meaningfully expanded our footprint in wealth channels globally, and today have a nearly 150-person dedicated client-focused team across 10 countries. Demand for our investment capabilities has grown as clients seek increased exposure to alternative assets. Our capabilities in real estate, infrastructure, renewable power & transition, private equity, and credit are resonating with wealth investors across all regions.
As an example, we recently announced an agreement with Fidelity Investments Canada to manage a newly formed portfolio of high-quality Canadian real estate assets on behalf of Fidelity private wealth clients. Similarly, our open-ended private infrastructure offering continues to receive strong support from investors. We launched the fund in February with a select group of distribution partners outside North America and have raised in excess of $1.3 billion to date. Later this year we will launch in additional jurisdictions and expect a further acceleration of growth. Additionally, year-to-date we have raised nearly $3 billion in various Oaktree strategies in the private wealth channel.
Secondary and Structured Capital Solutions—Allocations of capital into flexible, partnership and solutions- oriented mandates continue to increase and gain prominence in the market. Over the past several years we have focused on building this business across different sectors. Our Special Investment business, which focuses on the private equity and real assets sectors, is an excellent example of this. As an expansion of this line of business, we have recently entered into a joint venture with Sequoia Heritage, with whom we have a long-standing relationship, to set up a new, independent asset management business focused on secondary and structured capital solutions in the technology and venture capital space.
This new business is called Pinegrove Capital, and it focuses on providing dedicated, scalable, and customized product strategies for sponsors and investors in the venture capital and technology sector. Pinegrove will raise an inaugural fund in the first half of 2024. To support this effort, Brookfield Asset Management and Sequoia Heritage will collectively invest $500 million as anchor investors and provide other support as needed to ensure Pinegrove’s success as an independent business that is able to leverage Sequoia Heritage’s considerable expertise in the venture capital and technology sector, and Brookfield’s considerable expertise in secondaries and structured investments.
Size and Scale Matter
Liquidity in the bank market is improving, equity markets have been on a strong, although not broad, run and credit spreads for high-quality borrowers have compressed back to early-2022 levels. These early signs of improvement are encouraging and should be supportive for our business. That being said, credit conditions remain relatively tight, which continues to benefit those with strong balance sheets, high-quality assets, and long-standing relationships, such as us.
During the period of stress in the capital markets in the first half of the year, we strategically invested significant capital, while many investors disappeared from the market due to either lack of confidence, lack of equity, or an inability to secure debt. Year-to-date, we signed agreements to acquire companies and assets valued at more than $50 billion across our core geographies and asset classes, making us one of the most active alternative investment managers globally this year.
Our ability to successfully deploy capital in this environment stems from several competitive advantages:
- We have access to global scale equity capital from a broad range of sources, including our publicly listed affiliates and private funds across diverse geographies and institutional types./li>
- The assets we focus on are in favor. They have a unique combination of characteristics that deliver principal safety in uncertain times, inflation-protected cash flows, and the ability for long-term capital appreciation. As a result, clients are looking to increase exposure to these assets and lenders are willing to continue to provide capital backed by these assets.
- As one of the largest asset managers in the world, we have built a longstanding reputation for prudently funding our businesses to ensure success across all market environments and, as such, have built strong relationships with the largest banks and lending institutions around the world, ensuring that we have continued access to capital at scale throughout market cycles.
We also benefit from ±$140 billion of permanent capital on the balance sheet of our parent Brookfield Corporation (BN), which has: no restrictions, no time limits, and no geographic constraints; $50 billion of permanent equity capital of our three listed affiliates; and a large global fundraising organization that raises significant amounts of capital in our private funds annually.
These capital sources are large—but more importantly are very flexible, which allow us to do things differently than most. Our numerous sources of capital enable us to offer permanent capital, structured investments, and traditional private equity-type capital across the risk-reward spectrum to facilitate a transaction. Our goal is to continue establishing ourselves as the go-to firm when a seller of assets looks to transact with size and flexibility. This is very powerful.
Equally important to this strong level of investment is the robust monetization activity we have achieved over the last several months. This again reinforces the ability for us to sell at strong values across market cycles and the increasing demand and strong appetite for high-quality businesses that have been de-risked and simplified through the execution of our business plans.
We Will Triple Our Insurance Assets Under Management
While we have been very active on the deal front sourcing attractive risk-adjusted opportunities for our clients, we have also been exploring prospects for strategic acquisitions to further expand our platform. This includes opportunities that would complement either our asset management businesses or Brookfield’s insurance platform, Brookfield Reinsurance (BNRE). BNRE recently announced an agreement to acquire American Equity Investment Life Holding Company (AEL) in a public-to-private transaction that will significantly expand Brookfield’s insurance strategy. AEL is a large-scale, independent annuity writer in the United States. While Brookfield Asset Management (BAM) is not investing its own capital in the transaction, the asset management business will benefit significantly from this acquisition, underscoring the rationale for our spin-off and highlighting the advantages of its place within the Brookfield ecosystem.
Once closed, BAM is expected to become the investment manager for $50 billion of AEL’s capital, effectively tripling our insurance fee-bearing capital. The transaction increases BAM’s stable fee-related earnings from managing this insurance capital by approximately $125 million annually. In addition, we target allocating approximately 40% of our insurance capital into our private funds, which will generate additional fee revenues consistent with our market fee structures.
As an added benefit to the asset manager, by virtue of its structure, this transaction will increase the public float of BAM by nearly 10% without causing any dilution to BAM shareholders. BNRE will pay for a portion of the consideration for AEL using approximately 30 million shares of BAM, valued at $1 billion, that are currently owned by Brookfield Corporation (BN). BN’s ownership in BAM is currently 75%, and this transaction will reduce its stake by approximately 2%, thereby increasing the public float. The transaction is expected to close by the end of the year or shortly thereafter, subject to regulatory and shareholder approval.
Today, we manage $27 billion of insurance capital, and BNRE’s stated goal is to grow its insurance float to $225 billion by June 2027. With a significant portion of that capital slated for allocation into private credit funds, we see meaningful potential to materially grow and develop our private credit business. Combined with capital raising from clients, we foresee a path to taking our private credit business to $500 billion in the next five to ten years.
The Best Real Estate Opportunities Since 2009 Are Coming
Since we began investing for clients in the early 2000’s, we have acquired nearly $100 billion of properties across cycles and in nearly every real estate sector and strategy, generating an overall average of over 20% annualized gross returns. Throughout our extensive and successful history of investing in real estate, we have repeatedly seen volatile markets generate opportunities to acquire high-quality real estate for exceptional value. Today, higher interest rates, inflation, and tightened lender requirements are creating uncertainty and pockets of stress in real estate markets across the globe, particularly in the U.S. This cycle is evolving largely into a story of capital markets (and the stress within) versus fundamentals in most asset classes, and we think it will ultimately favor managers with experience through cycles, access to large scale capital and strong lender relationships.
Despite the challenges we are seeing today, most real estate fundamentals are strong: multifamily rents in the U.S. are up 15% year over year; premier office rents are at all-time highs, rents for logistics properties grew 11% in 2022; hotel rooms are full, with ADRs ahead of pre-pandemic levels, and high-quality retail centers hit record sales in 2022.
On the supply side, land constraints, high costs of materials and scarce financing will keep new commercial real estate supply to a minimum, allowing continued rent growth that often outpaces inflation.
Since the global financial crisis in 2009, we don’t believe there has been a more fruitful environment to execute our longstanding investment strategy: buy high-quality assets for value when their financial structures are compromised, and drive upside through active asset management.
With boots on the ground across the globe and decades of operating experience in all major real estate sectors, our hands-on approach gives us control over investment outcomes through cycles and is well-suited for today’s environment. Rather than relying on multiple expansion, we leverage our operational expertise built over 50 years of real estate investing, global tenant relationships across our large platform, and the Brookfield ecosystem to make data-driven decisions and create value through leasing, rental appreciation, refurbishment, and redevelopment.
These capabilities have generated significant achievements across our real estate portfolio in recent months, in spite of market disruptions: double-digit rent growth and 2.4 million square feet of leasing year-to-date across our logistics portfolio in the U.S.; revenue at our Indian hotel business exceeding plan by 25% year-to-date; and ±99% occupancy in our Brazilian, South Korean, and Dubai trophy office portfolios, with renewal rates 20% ahead of plan.
With nearly 30,000 operating personnel in 30 countries, we have exceptional insight into the global real estate market. The Brookfield ecosystem enables us to unearth attractive opportunities that others may overlook or cannot undertake, and to react to changing market conditions in real time, on an asset-by-asset basis. Given the turmoil markets across the globe are experiencing, we believe there is tremendous opportunity ahead to acquire some great real estate for value, once again.
Closing
We remain committed to being a world-class asset manager and strive to invest our capital in high-quality assets that earn solid returns, while emphasizing downside protection. The primary objective of the company continues to be to generate increasing cash flows on a per-share basis, and to distribute that cash to you by dividend or share repurchases.
We look forward to seeing you on September 12th in New York at our Investor Day. If you cannot attend in person, our presentation will be webcast live on our website, and also available for replay.
Thank you for your interest in Brookfield, and please do not hesitate to contact any of us should you have suggestions, questions, comments, or ideas you wish to share.
Sincerely,
Bruce Flatt
Chief Executive Officer
Connor Teskey
President
May 10, 2023
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