Brookfield Capital Partners (BCP) and Private Funds

Brookfield Asset Management’s fourth business platform consist of private equity and specialty funds managed under Brookfield Capital Partners (BCP) or the respective operating platform: property (BPY), renewable power (BREP) and infrastructure (BIP). Brookfield Capital Partners also includes Brookfield’s Residential Development interests, an opportunistic area of increased activity during the U.S. housing market downturn.

The private funds are financed with private capital from institutional investors alongside Brookfield Asset Management’s capital. There are currently 28 private funds under management and 6 new funds in the process of raising an additional $5 billion from institutions. These areas are highlighted in gray on the graphic below. Fund Structure

[Source] Brookfield Year Ended 2012 Supplemental Information

Fund Strategy:

As an asset management company, the value of the company will grow with cash flow from operations and as asset management fees grow with capital under management. Capital under management generally resides in funds managed by BAM under contractual arrangements where they earn asset management fees, performance incentives and other fees. This ability to earn management fees along with BAM’s direct investments increase returns on invested assets without compromising on quality or the disciplined approach to financing.

Funds may be established with co-investors for specific acquisition and then under certain circumstances, serve as a platform to expand the assets and operations within the fund. Alternatively, a fund may be established with a specific mandate to seek out investment opportunities. The strength of BAM’s balance sheet enables a dedicated team to build a portfolio and then market the portfolio to potential investors. The breadth of BAM’s operating platforms creates the opportunity to seed funds with assets owned and operated for many years and provides a unique investment for co-investors.

Fund Strategies

[Source] Brookfield Private Funds Overview

BAM typically commits at least 25% of the capital in the managed funds. They believe their capital aligns interests with co-investors and differentiates them from competitors and provides the opportunity to earn an attractive return. The fees for managing funds vary by strategy and include; a base fee for ongoing services; a performance incentive (carried interest) that is a portion of the amount by which investment returns exceed predetermined thresholds (return hurdle), and transaction fees for certain activities.

Fund Fee Structure

Financing with debt is without recourse to Brookfield Asset Management. Their policy is not to guarantee the obligations of any fund or operating entity other than BAM’s own equity commitment. The funds also have the ability to raise additional equity capital from their stakeholders, including BAM, from the public capital markets or through private issuances.

Private Equity:

The Private Equity business is focused on opportunistic investments within a value framework. They use their experience in distress investing with the objective of controlling the underlying businesses, or invest in industries where they have deep in house operating expertise. The private equity funds mandate is to invest in a broad range of industries. Private Equity funds have been offered to institutional investors since 2001 and currently the portfolios contain a number of investments impacted by the North American home building industry.

Private Equity Funds

[Source] Private Funds: Private Equity

An example of investments made in the private equity group under Brookfield Capital Partners is Norbord and Ainsworth. These companies sell oriented strand board (OSB) to homebuilders and during the five difficult housing years Brookfield invested substantial capital in their business. As the housing fundamentals now improve the share prices of both companies tripled and OSB prices more than doubled.

Private Equity Performance:

Since the launch in 2001 a total of $2.4 billion was raised with Brookfield providing 50% of the capital in the first fund compared to 28% in the most recent fund (as of October 2012), illustrating increased participation by third party investors.

Private Equity Performance

Of the total $2.4 billion raised, $1.7 billion was invested yielding 2.4 times the initial investment for investors net of fees resulting in a gross 24% and net 17% per year return over the 11 years since launch through October, 2012.

Private Equity Returns

The $0.7 billion not invested is an example of the disciplined approach that has enabled Brookfield to build a strong performance reputation to attract new capital. If the opportunity does not meet target return objectives, they pass on the lower return, forgo the fees, and return the money to investors. This discipline contributes to the outstanding returns when compared to the S&P 500 and preserves Brookfield Asset Management’s performance record for future fund raising opportunities.

Yearend 2012:

As of yearend 2012 Brookfield Capital Partners private funds held a total of $2.7 billion in commitments. They fully funded the third fund, BCP III, with $1 billion of capital commitments where Brookfield invested $250 million. The first private equity fund BCP I was closed returning 2.2X committed capital to investors for a gross return of 31%.

Residential:

Residential operations are conducted through publicly traded Brookfield Residential Properties Inc. (BRP) a land developer and home builder in North America and Brookfield Incorporacoes S.A. in Brazil.

The North American operations, Brookfield Residential Properties, were recapitalized with over $800 million of debt and equity as the share price more than doubled from $8 to $18 allowing them to acquire new tracts of land in California and Alberta. Brookfield Asset Management provided $110 million and decreased ownership from 72% to 65%. The company’s debt to capitalization decreased from 56% to 43%. North America operations are well positioned to enjoy the ongoing U.S. housing market recovery as housing starts improve.

Brookfield sold their U.S. residential brokerage operations to Berkshire Hathaway for cash and a one-third ownership interest in the combined business which is operated as Berkshire Hathaway HomeServices. This is a rare joint venture for Berkshire Hathaway and in my view a compliment by Berkshire Hathaway to the capital allocation and management alignment at Brookfield.

Brazil operations are positioned to participate in housing demand by the growing middle class in that emerging economy. There $200 million common shares were issued of which Brookfield purchased a proportionate share.

BCP Deal Sourcing:

Brookfield Asset Management’s global reach, sector diversification and distress investing expertise provide ample leads for Brookfield Capital Partners allowing them to be selective in identifying and choosing opportunities. Long standing relationships with restructuring professionals, investment bankers, lawyers, accountants and lenders are leveraged over globally through Brookfield’s 600 investment professionals.  During a 12 month period the private equity group reviewed 40 transactions across various industries of which three became investments.

BCP Deal Sourcing

[Source] Above tables from BAM 2012 Investor Day Presentation

Total private equity and residential assets under management increased to $26 billion during 2012 and Brookfield is currently investing through Capital Partners Fund III.

Private Equity and Residential Table

[Source] Brookfield’s 4Q12 Supplemental Information

Real Estate Funds:

As one of the largest investors and operators globally in office, retail, residential, multifamily, industrial, and hotel sectors Brookfield has built a global real estate portfolio that positions them to capitalize on large, complex investment opportunities. BPY offers real estate equity and debt investment funds to institutional investors targeting superior, long term, risk adjusted returns. The deep value investing strategy and expertise in corporate restructuring is central to the fund offerings and investment approach managed through BPY.

The property platform manages a series of opportunistic, finance, and sector specific real estate funds. Opportunity and turnaround funds typically involve more active management and higher fees. They tend to have higher risks and higher return expectations. Often, much of the value is created over a two to three year time through refinancing and repositioning the assets or the business.  Higher investment returns are expected over a shorter period than the core and core plus strategies, and the base management fees and incentive returns are intended to be similar to private equity arrangements.

BAM’s focus on high quality long life assets creates significant activity in the core and core plus strategies. The fees (and margins) associated with these strategies tend to be higher than fixed income and common equity, but lower than the opportunity and turnaround strategies.

Listed securities and fixed income funds include varying degrees of risk, return and management intensity ranging from traditional fixed income management to more active strategies involving portfolios of equities, high yield and leveraged securities. The gross fees earned for managing these assets tend to be much lower than the other funds; however the contribution is attractive due to the ability to manage large volume portfolios.

BAM also owns and manages assets which are not currently subject to fee bearing arrangements. Most of these were formed prior to the creation of the institutional funds, and some were more recently acquired to supplement existing platforms, or in anticipation of new funds being created.

Real Estate Funds

[Source] Private Funds: Real Estate

Real Estate Fund Performance:

In the 2012 Investor Day Presentation, Ric Clark, CEO of Brookfield Property Partners reported the following results for the property private funds. The combined results showed Brookfield invested $10 billion alongside institutional investors and since 2004 generated a combined return of 17.6% or 1.6 times multiple of capital (MOC).

Feal Estate Fund by Strategy

These results haven’t gone unnoticed as Ric Clark reported in the Investor Day Presentation [Source]: “Over the last five years the merits of our investment and fund management approach…have been well received by the investor community as well. During that time we have raised $16.5 billion of real estate funds, $11 billion of third party capital, alongside $5 billion of our own capital. We now have 50 LP fund investors within our various real estate funds and growing, and most importantly, of the larger investors in these funds, those investing $200 million or more, we have a 70% repeat investor rate and, of those investing $50 million or more, a 50% rate. We expect that those figures will grow over the next little while and as we book our performance on our existing funds.”

Real Estate Investor Base

[Source] Above Real Estate Tables from BAM 2012 Investor Day Presentation

Real Estate BPY Invested Capital

[Source] Above BPY Corporate Profile, April 2013

Infrastructure Funds:

Brookfield Infrastructure owns, operates and manages $39 billion of infrastructure assets including renewable power and transmission, transportation, and energy. Brookfield also directly owns, manages and finances timberlands, paper and forest product companies in North and South America and agricultural land in Brazil for more than 30 years. Combined the timberland and agriculture assets are valued at approximately $5 billion.

The global infrastructure and the North and South America timberland and agriculture presence is used to offer funds to institutional investors targeting superior, long term, risk adjusted returns managed through BIP.

Infrastructure Funds

Infrastructure Fund Performance:

In the 2012 Investor Day Presentation, Sam Pollock, CEO of Brookfield Infrastructure Partners reported the following results for the infrastructure funds.

Infrastructure Fund Performance

Timber Funds Performance

Infrastructure Funds by Georgraphy

Investment Attributes:

High demand for real asset based funds are driven by the attraction of low volatility and good risk adjusted rates of return when compared to the low yields and high volatility experienced in the financial markets. The demand for these essential services through real assets provides solid and stable yields. The yields are increasingly attractive to investors compared to near zero interest rates, at times, yielding negative real returns and a real loss of capital over time. Real assets empirically show inflation protection characteristics that offer a defensive alternative to possible increase rates of inflation through government monetary policies.

Past Performance:

Assets under management (AUM) has grown at a rate of 14% per year over the past five years reflecting Brookfield’s increased investing activity during times of market distress and subsequent asset value appreciation. Fee bearing capital increased at a rate of 2% per year and declined from 57% of total AUM in 2007 to 37% at yearend 2012. During the 1Q13 it will increase significantly with the spinoff of Brookfield Property Partners and the resultant fees.

AUM Bar Chart

Brookfield’s strategy is to use acquired assets as a source of future business platforms that will eventually generate fees as capital under management. The spinoff of BPY during 1Q13 is a very recent example of this strategy being implemented. Strong AUM growth should be considered a positive leading indicator of fee bearing asset growth.

The amount of fee bearing assets is just part of the story. During the period of 2% per year growth in fee bearing assets, fees and income increased 24% per year reflecting strong performance and incentive payments. Some performance income although earned is not recognized until certain “claw back” periods expire.

Fees and Income Graph

The fee and income growth appears to be a positive indication of the underlying performance and  future potential of BAM’s global asset management business model.

Performance by Strategy and 2012 Fees and Income

Future Growth:

As governments and companies around the globe are forced to sell assets to repair debt laden balance sheets the opportunities for value based transactions increase. Governments also are reducing expenditures on infrastructure and opening infrastructure projects to private capital, further increasing the opportunity set for real asset investment specialists like Brookfield.

BAM’s goals are to enhance returns through performance based management fees, diversify risk and broaden the scale of transactions that they can undertake. Their experience, focus and proven performance in real asset management positions them well for the private funds to be a significant growth driver. Brookfield Asset Management’s CEO Bruce Flatt writes in the 2012 Annual Report [Source]: “We expect that over the next 10 years, most institutions will increase their allocations of real assets to between 25% and 40%. We believe the impact of this trend will be similar to what took place decades ago, when institutions shifted from bonds to common stocks and valuations on equities soared. While there is some risk that returns will be driven down by these major capital flows, it is important to note that there is a confluence of events occurring. That is, the supply of assets available for investment is also likely to grow dramatically as governments undertake the deleveraging that must occur to get their fiscal books in order.”

“As institutions continue to increase allocations to real assets, we believe we are one of a few global asset managers who have the depth of experience, capital and operational capabilities to participate meaningfully in this transformation.”

Private Equity:

BAM’s differentiator is the operating skills they bring to situations where they invest. The operating skills and value orientation leverage the financial strength and restructuring expertise to take contrarian positions in markets or industries that most fear at that time. The activity in residential  housing over the past few years is a good example of investing during market distress and when prices and expectations are low.

Residential Real Estate:

In the 3Q12 Letter to Shareholders [Source], CEO Bruce Flatt explains the upside potential of Brookfield’s investing theme in the U.S. residential housing recovery; another example of their patient, value oriented and disciplined approach: “During 2009, one of our strategies was to invest in companies which would ultimately benefit from the U.S. housing recovery. The good news is that the housing recovery appears to be underway and our investments geared to housing should benefit disproportionately. This includes our U.S. and Canadian land development and housing operations, two entities controlled and led by us which produce oriented strand board a number of private equity investments which supply the industry, and our timber as well as housing brokerage operations.”

“All together we have $5 billion of capital dedicated to these investments, with our proportionate share being approximately $3 billion. Currently our share of these investments generates $300 million of annual cash flow but we estimate that if we had owned all of these operations in 2007, they would have generated closer to $1 billion of annual cash flow. We believe that normalized U.S. housing sales will be 1.2 to 1.4 million units.”

“Extrapolating 70% of the peak earnings, these businesses should generate $1.4 billion, of which about 70% or $1 billion of that would accrue to us as investors, and the balance to our fund partners and other investors. This is an increase of three times from the reported annual cash flows of $300 million generated from these operations today and therefore could be very meaningful to us over the next few years. Granted this recovery will not occur over night, but we do expect an advance towards these numbers over the next three to five years.

Real Estate:

The transformation to global asset manager is bringing more recognition as one of the world’s largest and top performing real estate asset managers. The real estate segment has generated annual compound returns of about 15% over the past 23 years and the results are attracting large investors interested in the merits of real assets and the value framework.

The property segment sponsors private funds where they can leverage Brookfield’s strengths, in deal sourcing, operations, finance or restructuring. Through these funds Brookfield gains access to large scale transactions with the potential for significant returns alongside private institutional partners. Brookfield typically holds the largest interest in the funds and expects to be the lead investor in the future. Over the past five years $16.5 billion of real estate funds were raised; $11 billion of third party capital alongside $5 billion of Brookfield capital.

Infrastructure:

The flagship private fund is the Brookfield America’s Infrastructure Fund that invests in both infrastructure and renewable power primarily in North and South America. The fund was closed two years ago and the total capital committed to the fund has been deployed. As of June 30th it’s generated a gross IRR of 24% to investors.

In the 2012 Investor Day Presentation [Source}, Sam Pollock, CEO of Brookfield Infrastructure described the investment environment this way:  “I think the other positive trend from an investment environment perspective is the fact that our access to capital is very strong. There are a number of investors, both public and private, that have recognized that the infrastructure sector is a great place to invest today and so our ability to attract that capital has probably never been better.”

The funds are fully invested as he further reported: “On the private side we have fully invested funds in transmission and in timber, our flagship, America’s Infrastructure Fund, and a few regional infrastructure funds in Columbia and Peru, as well as global timber funds.”

Timberland:

Brookfield established one of the largest global timberland holdings over the past seven years. It is a core investment strategy and provides solid risk adjusted returns for investors. Since 2005 Brookfield invested about $3.5 billion through 11 timber transactions. Sam Pollock commented; “Our return expectations for this business are typically around 10% to 12% and while collectively, our timber returns and our funds have achieved a gross IRR of around 8% to date, this has been achieved in a very difficult market environment due to the housing situation here in the United States. We expect far more robust conditions going forward as the housing market continues to improve in North America and as a number of supply factors take hold. As a result, we expect our returns to improve.”

Brookfield Asset Management’s CEO Bruce Flatt added these thoughts on timber in his 4Q12 Letter to Shareholders [Source]; “…and are considering a number of alternatives for our timber assets, which could include further institutional ownership or listing in the public market…In the short term, our goals include substantial fund raising for our private funds… and surfacing value from our timber assets and numerous businesses related to the housing sector.”

Capital under Management Growth:

Private Funds: Management is seeking to raise $5 billion during 2013 and 2014 and during the Investor Day Presentation discussed private funds increasing at the rate of 11% per year over the 10 year plan. This would average about $3.5 billion per year through 2017 increasing to an average of about $5.5 billion per year 2018-2022. So, in the case of private funds we assume $2.5 billion is raised in 2013 and 2014 meeting management’s $5 billion goal and then increasing at the rate of 11% per year.

BAM General Partner Listed Issues: We assume the listed issues of where Brookfield Asset Management is the General Partner; Brookfield Property Partners (BPY), Brookfield Infrastructure Partners (BIP), and Brookfield Renewable Energy Partners (BREP) will increase according to their respective targets as discussed in the separate posts on these entities. These targets are a 12-15% per year total return of which 3-7% per year is allocated to distribution increases. The remainder is retained for reinvestment and growth is further financed with $500 million per year of equity issuance through 2017 and $750 million in 2018-2022.

BAM Affiliated Other Listed Issues: Listed Issues, not fee bearing, in which Brookfield Asset Management has direct investment will be increasingly managed within the fee bearing private funds.  However, in the absence of the rate of this transition, we assume the issues remain stand alone and increase funding at the same rate of 11% per year rate assumed for private funds. This should be conservative as fees that may be collected are not included.

Public Securities: Money flows into the public securities funds managed by Brookfield are assumed to increase at a rate of 12% per year benefitting from increasing Brookfield performance recognition. The Investment Company Institute 2012 Fact Book [Source] shows the industry growth rate was a strong 21% per year over the past 16 years ending 2011 and 8% during the decade with two severe market declines.

Using the lower 12% growth target for the BAM General Partner (BAM GP) listed issues and the assumptions discussed above the following table shows the estimated growth in capital under management.

Capital Under Management Estimates

Summary:

Brookfield experience in desirable real asset across different platforms and adherence to the discipline of value investing should create significant advantages for them, their co-investors, and shareholders for years to come. As presented on their Private Funds Fact Sheet [Source]:

Owners & Operators: As long-standing operators of and investors in real assets, we believe our operations-oriented approach provides us with a distinct competitive advantage to actively manage our investments to enhance value on behalf of our clients.

Alignment of Interests: We invest alongside our clients, and are typically the largest investors in our investment vehicles. In addition, Brookfield’s senior management has a significant ownership stake in the company.

Restructuring & Financial Expertise: The breadth and depth of our financial, mergers and acquisitions, and restructuring capabilities have earned us a strong track record and reputation for investing in multi-faceted situations and distressed businesses, and enables us to execute transactions that most others cannot.

Value Oriented: We acquire assets on a value basis to maximize long-term, risk-adjusted return on capital. We believe contrarian thinking produces many of our best investments.

Capital Preservation: Protecting the capital entrusted to us is at the forefront of how we think about risk and, therefore, we pursue a prudent and disciplined approach to investing and to leverage.

Experienced Team: Our Senior Managing Partners and Investment Committee members have an average of 27 years of experience, collaborating together for an average of 17 years.

Global Presence: We are well-positioned to pursue opportunities on a global scale with approximately 600 investment professionals and 24,000 operating in 100 offices around the world.

In the next post we’ll estimate the value of Brookfield Asset Management.

Disclosures: Long BAM, BIP, BEP, BPY

References:

  • Brookfield Private Funds Website [Source]
  • Brookfield Asset Management Website [Source]

 

 

 

 

 

 

 

 

 

Speak Your Mind

*