Brookfield Asset Management Inc. (NYSE:BAM) Q1 2023 Earnings Call Transcript

Brookfield Asset Management Inc. (NYSE:BAM) Q1 2023 Earnings Call Transcript May 10, 2023

Brookfield Asset Management Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.33.

Operator: Hello and welcome to the Brookfield Asset Management First Quarter 2023 Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference call over to our first speaker, Ms. Suzanne Fleming, Managing Partner. Please go ahead.

Suzanne Fleming: On the call today are Bruce Flatt, our Chief Executive Officer; Connor Teskey, President, Brookfield Asset Management; and Bahir Manios, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor who will talk about some of the themes we are focused on; and finally, Bahir will discuss financial and operating results for the business. After our formal comments, we will turn the call over to the operator and take analyst questions. In order to accommodate all those who want to ask questions, we ask that you refrain from asking more than two questions at one time. If you have additional questions, please rejoin the queue and we will be happy to take any additional questions at the end, if time permits.

I’d like to remind you that in today’s comments including in responding to questions and in discussing new initiatives in our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. These statements reflect predictions of future events and trends and do not relate to historic events. They are subject to known and unknown risks and future events and results may differ materially from such statements. For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website. And with that, I will turn the call over to Bruce.

Bruce Flatt: Through a strong start in 2023, our financial performance was strong and we have good momentum on fundraising. We posted distributable earnings of $563 million that was up 15% compared to the prior year. Inflows year-to-date have been $19 billion, which on a 12-month basis, that’s almost $100 billion in the last period. Despite macroeconomic headwinds that generally make all business harder, we expect 2023 to be another very strong year for the business overall and for fundraising on par with 2022, which was a record year for our business. We currently have all fiber flagship funds and several other complementary strategies in some stage of fundraising this year. Our ability to raise capital is driven in large part by our long track record of exceptional investment returns, the relationships we have built over time, with institutional investors around the world and a particular focus on businesses which are well-positioned in this current environment.

Our long-life high-quality assets and businesses with durable, stable or contractual and inflation protected cash flows have proven their resiliency in every economic cycle over the past 30 years. They remain resilient today and they should remain so for another 30 years. Deployment has also been strong. Public valuations are more reasonable today, which has allowed us to complete a number of take privates with little or no competition. We recently agreed to deploy more than $12 billion of equity into a number of exceptional long-term investments. These transactions highlight the type of investments that we can find in which few others can execute on. Bringing together our strength as a value investor are significant capital resources and our heritage as an owner and operator of real assets over many decades.

The largest of these transactions was Origin Energy. We are alongside a consortium of investors. We made a commitment to acquire the company at an enterprise value of approximately $9 billion in a public to private transaction. The transaction will enable us to deploy our renewable development capabilities to decarbonize and transition a very large energy market player in Australia in line with the global transition funds mandate, while also generating what we believed to be excellent returns. At the same time, the private markets remain fairly open in terms of asset sales, particularly with respect to infrastructure and renewable assets that generate strong inflation protected cash flows and often include assumable debt financings. Our infrastructure business has been very active on the monetization front, transacting on 7 asset sales in the past year at strong valuations and have a number of others that we expect to execute on in ‘23.

Our renewables in transition group has also been active on this front executing numerous transactions in the past 6 months and we expect more over the remainder of the year. As we look ahead, we see a number of opportunities to put our vast resources to work. The current market environment has accelerated growth opportunities with a particular focus on take-privates and opportunities in and around credit more broadly speaking. First, with respect to take-privates, we continue to explore a number of significant take-private opportunities across the business. And we expect more on this front this year, across virtually every one of our businesses. Second, in distressed debt, the volatility we are seeing in the market today, including the issues in the regional bank market in the U.S., are accelerating the opportunity to put money to work at excellent returns.

We have not seen markets like this for a while. This is a significant opportunity for a distressed debt franchise and likely also our private equity funds and real estate funds. Our long track record of achieving excellent returns for clients in times like this give us a great advantage as the market evolves. Our business usually excels in periods such as now and this presents great opportunities for us. Third, in private credit, in addition to distressed debt, we are seeing a significant opportunity more broadly in private credit. We have methodically built out a private credit franchise over the past 15 years centered around our core competencies with the view that loans from banks to corporate real estate owners and sponsors would decrease over time creating a sizable investment opportunity.

We have been seeing our thesis play out for many years and with the recent tightening in credit conditions, our track record expertise and ability to invest vast sums of capital will continue to scale this business. Our inaugural large cap flagship loan fund with $2 billion newly committed from Brookfield Corporation will be one of the hopefully the largest funds in the industry. But this is just the beginning for us in private credit. Lastly, before I turn the call over to Connor, I will just make a few quick remarks on the state of the markets and how they reflect on our business. Inflation is beginning to ease to more moderate levels and the market expectation for interest rates is starting to stabilize. While the Fed’s continued rate hikes have had their desired effect of curtailing inflationary pressures, the secondary effects of the sharp rise in interest rates are only beginning to work through the financial system.

Capital has become increasingly scarce and relatively more expensive versus the lows of the last number of years. This leads asset owners who must refinance debt or fund growth with fewer options. This should create an opportunity for large asset managers with significant dry powder to put to work and we are included in this group. Thank you for your continued support of our franchise. I’ll now turn it over to Connor and he is going to cover specifically infrastructure.

Connor Teskey: Thank you, Bruce and good morning everyone. We would like to spend some time on today’s call to provide an overview of our market leading infrastructure business. As we have many new investors who are increasingly becoming familiar with our franchise, we thought it might be helpful to first start with an overview of our infrastructure capability and then discuss some of the themes and recent transactions we have announced. By way of background, we manage approximately $160 billion of infrastructure assets globally and have nearly $100 billion of fee-bearing capital within our infrastructure portfolio. These investments are supported by a strong team comprised of over 300 investment and asset management professionals with a local presence in approximately 30 countries.

This makes us the largest and most experienced manager of privately held infrastructure assets. Now, there is one important distinction to ensure that we point out. When we discuss our infrastructure business, the $160 billion figure referenced above, it does not include our renewable power and transition assets. At Brookfield, we have separate dedicated teams that focus on renewable energy investments. This is unlike others, but the scale of what we have, demands two different groups. These two teams are integrated in discussing investments and deployment opportunities and together have combined assets under management of approximately $230 billion and fee-bearing capital of around $150 billion. But on today’s call, we are going to focus solely on our infrastructure business as we define it.

And at some other time, we will focus on many of the exciting things going on in our renewable power and transition platform. Our infrastructure portfolio is owned through several closed end debt and equity funds, an open end core plus strategy, and a recently launched semi-liquid strategy in private wealth networks. That’s in addition to our permanent capital vehicle, Brookfield Infrastructure Partners, or BIP, that has the $50 billion enterprise value. Lastly, our infrastructure business is highly diversified and spans a wide array of asset types from utilities such as gas pipelines and power transmission businesses to transport assets that include ports, roads and railways, midstream assets and digital infrastructure assets comprised of towers, data centers, and fiber networks.

Our infrastructure business has been very active in the past few years. 2022 was a record year in terms of capital deployment and we are off to an amazing start in 2023 having already committed and/or deployed to more than $15 billion of investments. We view this as a function of two things: first, that there is a once in a generation market opportunity to fund an unprecedented build-out of new infrastructure assets and then second is that we have the global platform with the scale and capabilities to execute on the most attractive investments within that growing opportunity set. You may have heard us speak before about the infrastructure super cycle that is unfolding today. Let us spend a few minutes to take you through the three themes that our teams are spending most of their time on.

First, digitalization, this refers to the infrastructure investment opportunities that are derived from the exponential increase in data consumption. Think of what you consume daily on your iPhone. Data is still the world’s fastest growing commodity. Based on current usage patterns, the amount of data that is generated globally is expected to double over the next 18 to 24 months and this pace is only going to continue to accelerate. Like any commodity, all this data needs to be transported, processed and stored. In order to facilitate this growth, significant investments are required into each one of these segments. Historically, these investments were funded by traditional telecom operators or technology titans. But given the increasing demand, those counterparties are now seeking new capital partners in order to alleviate the weight on their balance sheets.

We are already seeing the market opportunity playing out across three verticals: fiber networks, wireless power networks and data centers. With fiber, we are witnessing a once in a 100-year investment upgrade to replace legacy copper networks with fiber to the home infrastructure for new and existing residential developments. In wireless infrastructure, the mobile network operators or MNOs need to make significant investments in order to densify their networks and make them 5G ready. And lastly, the data center sector is experiencing significant tailwinds from the migration to cloud computing. When combined with the expected increase in data demand, it is estimated that 10,000 megawatts of new data center capacity will be required in the next decade.

And these trends are not slowing down. With the growth of AI which utilizes exponentially more data and requires significantly more computing power, we expect demand to only accelerate from here. The next theme is decarbonization. You may have heard us speak about this on previous calls and in our materials, we have talked about how the decarbonization of the global economy will be a multi-decade initiative requiring substantial investment. To-date, attention has been focused on the industries and companies that are directly responsible for the emissions or supply side decarbonization. This is an opportunity for our renewable power and transmission business and they are investing in this opportunity heavily. However, a second aspect of decarbonization is the investment opportunity created by consumer preferences for energy efficient solutions or demand side decarbonization.

These opportunities are driven by consumer preferences for energy efficient solutions that can help them manage their carbon footprint, save money, and meet legislative net zero targets thus creating a market opportunity for infrastructure capital to alleviate the high upfront cost and installation and the ongoing complexity of servicing and maintaining this increasing installed base of decarbonization equipment. This is what our infrastructure business is very focused on. And the third theme we want to touch on is deglobalization. In recent years, geopolitical tensions in the pandemic have caused substantial disruptions, forcing companies to rethink their global supply chains. On one hand, we are witnessing a wave of onshoring projects associated with high tech and strategic components, such as our semi – such as semiconductors and medical essentials.

A great example of this is our $15 billion investment in one of the Intel semiconductor fabrication facilities, which is currently under construction in Arizona. On the other hand, lower value goods such as apparel, furniture, or household items continue to be manufactured in lower cost jurisdictions. Rather than reshoring, companies are instead looking to geographically diversify their supplier base, reducing their reliance on any one location or one supplier. While critical goods are increasingly being produced at home, broader supply chains are looking to increasingly balanced just in case with just in time. A good example of a transaction that will capitalize on this trend is our agreement to acquire Triton International in a $13 billion take-private transaction, which will further enhance our infrastructure footprint underpinning global supply chain.

Triton is the world’s largest owner and lessor of intermodal containers and is a critical provider of global transport logistics infrastructure. The size and scale of Triton’s global network differentiates it from competitors, driving lower procurement and financing costs and enjoying structurally high fleet utilization and margins. As we look ahead, we estimate that it will take more than $100 trillion of capital globally to invest across these three themes. At $100 trillion, the market opportunity is material and the size is tough to fathom. We are very well-positioned to capture a meaningful share of this opportunity set given our large scale and flexible capital, our global footprint with boots on the ground, and our deep operating expertise.

Those secular tailwinds in addition to an enormous appetite by clients to allocate more capital towards this sector gives us strong conviction around our ability to more than double our fee-bearing capital in the next 5 years. And so with that, we will turn it over to Bahir who will provide more details on our financial results and fundraising activities.

Bahir Manios: Thank you, Connor and good morning everyone. My remarks today will be focused on the results for Brookfield Asset Management on a 100% basis, which we believe is the most relevant way to describe our financial and operating performance. I wanted to cover off four topics this morning. First, I’ll discuss our financial results for the first quarter of 2023. Second, I will provide an operations update focused on our fundraising efforts and diversified client base. Third, I’ll touch on our balance sheet and then ended off by providing an outlook for the business for the remainder of the year. The first quarter of 2023 marked our first full quarter as a pure-play publicly traded alternative asset manager following our spin-off from Brookfield Corporation and we’re encouraged by the positive feedback we’ve received to date.

Our business is centered around extremely resilient and growing high quality cash flows and industry leading businesses, both of which are well positioned to benefit from secular global trends over the coming decades. This is bolstered by our access to large scale capital, global reach and deep operating expertise. First on financial results, as Bruce noted, there were strong, we reported fee-related earnings or FRE of $547 million in the quarter, representing an 11% increase over the prior year period. And when you normalize for a large transaction and advisory fee that we received in the prior year, our FRE was up 17%. On a 12 months basis, our FRE is up 22% benefiting from almost $100 billion of capital that we raised since the first quarter of 2022.

Our distributable earnings or DE for the period, were $563 million or $0.34 per share, which represents a 15% increase compared to the prior year. DE for the 12 months period ended March 31, 2023 was $2.2 billion, and that represents a 20% increase over the prior period, excluding the impact of performance fees that were earned in the prior period. Our margins for the period were 56%, which are in-line with the prior period after normalizing for above average transaction and advisory fees earned in that period. Our margins continued to be strong. Notwithstanding the great deal of investment we continue to make, building our capabilities on several new strategies. In addition to continued investments were making in our fundraising and client service organizations.

Moving on to fundraising, we’ve raised approximately $19 billion of capital year-to-date, continuing the momentum from our record fundraising year in 2022. As of March 31, we have over $825 billion in assets under management, and $432 billion in fee bearing capital, which increased 14% as compared to the prior year periods. Of our total fee bearing capital almost 85% is long dated, or perpetual or permanent in nature, providing us with a very stable base of revenue streams. We’re in the market with all five of our flagship funds at various stages and making good progress. We’re also raising capital for a number of our complementary strategies. We’re nearing the close – the final close of our fifth flagship infrastructure fund, which currently stands at $24 billion, which is our largest fund ever, and our sixth flagship private equity fund, which sits today at $9 billion.

Both funds already exceed the size of their prior vintage, and we still have meaningful capital to raise for these strategies. In January, we launched the fundraising for our fifth flagship real estate fund, with the objective of investing capital into a market that we believe should provide significant opportunities to invest at highly attractive risk adjusted returns. We expect the first close on this fund in the second half of the year. Earlier this month, we launched fundraising for our second flagship transition fund, which is focused on investing in and facilitating the global transition to a net-zero economy. We launched our first $15 billion transition fund in 2021. And after signing an agreement to acquire Origin Energy in a public to private transaction, more than 85% of that fund has been invested or committed.

Given the strong demand from institutional capital for this strategy, we expected the second fund in the series will be larger than the first. In addition to our flagship fundraising, we’re pleased to report that the following updates from a number of our complementary fund strategies. In February we launched Brookfield Infrastructure Income Fund, or BII, which is an innovative open-ended semi liquid infrastructure product, offering private wealth investors access to Brookfield Infrastructure platform. While private infrastructure has become a meaningful asset class for institutions, individual investors have historically had a few options to gain exposure to this important asset class. We launched BII with two distribution partners, and have raised more than $750 million in less than 3 months.

We also made very good progress fundraising across a number of our credit funds, raising over $8 billion year-to-date. Earlier this year, we also launched fundraising on our second vintage of our special investments, credit strategy, and we expect this fund to be meaningfully larger than the last fund. We’ve also continued to broaden and diversify our client base, enhancing resiliency and efficiency into our fundraising capability. We’ve increased fundraising from more geographic regions, with nearly 40% of the capital raised over the past year, coming from the Middle East and Asia. In terms of types of investors, almost 70% of our fundraising over the past year has come from public pensions, sovereign wealth funds, and insurance companies, which gives us access to larger pools of capital.

Private wealth represents a very small amount of our fundraising. But with the early success of products like BII, we still see it as a significant opportunity for growth in the future. Next, just on our balance sheet, we ended the quarter with $3.2 billion of cash and no debt and almost $80 billion of uncalled fund commitments. We’re also pleased to report that on the back of the strong financial results solid balance sheet and the strong outlook we have on fundraising activities. The Board of Brookfield Asset Management Limited, declared a quarterly dividend of $0.32 per share payable on June 30, 2023 to shareholders of record as of the close of business on March 31. And finally, before I turn it to the operator for Q&A, I thought I would just conclude by saying that we’re confident on our prospects for the year ahead for several reasons.

First, we’re well positioned with investment strategies that are very much in demand, offering our clients a wide range of products and strategies to help them meet their financial objectives. That in addition to the fact that we have a very diversified fundraising engine, provides us with conviction that our 2023 fundraising targets, which were in – that are in line with our record year in 2022, are achievable. That wraps up our prepared remarks for this morning. Thank you for joining the call. And we’ll now open it up for questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Cherilyn Radbourne with TD Cowen

Operator: Thank you. [Operator Instructions] The next question comes from the line of Alexander Blostein with Goldman Sachs.

Operator: Thank you. One moment please, for our next question. And our next question comes from the line of Alexander Blostein with JPMorgan. Pardon me, Alexander, your phone might be on mute. One moment please, for our next question. Alexandra Bernstein, your line is now open. Alexander, please check your mute button. One moment please. And our next question comes from the line of Nik Priebe with CIBC Capital Markets.

Operator: Thank you. One moment please, for our next question. And our next question comes from the line of Geoff Kwan with RBC Capital Markets.

Operator: Thank you. One moment for our next question, please. And our next question comes from the line of Sohrab Movahedi with BMO Capital Markets.

Operator: Thank you. One moment for our next question, please. And our next question comes from the line of Mike Brown with KBW.

Operator: Thank you. I would now like to hand the call back over to Managing Partner, Suzanne Fleming for any closing remarks.

Suzanne Fleming: Thank you, operator. And with that, we will end today’s call. Thank you everyone for joining us.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.