Brookfield Asset Management Inc. (NYSE:BAM) Q3 2023 Earnings Call Transcript

Brookfield Asset Management Inc. (NYSE:BAM) Q3 2023 Earnings Call Transcript November 6, 2023

Brookfield Asset Management Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.31.

Operator: Hello and welcome to Brookfield Asset Management’s Third Quarter 2023 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference call over to our first speaker, Ms. Jason Fooks, Senior Vice President, Investor Relations. Please go ahead.

Jason Fooks: Thank you for joining us today for Brookfield Asset Management’s earnings call. On the call today we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, President and Bahir Manios, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor who will talk about our private credit platform, and finally, Bahir will discuss our financial and operating results for the business. After our formal comments, we’ll 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’ll be happy to take additional questions as time permits.

Before we begin, I’d like to remind you that in today’s comments, including in responding to questions and in discussing new initiatives and 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 law. These statements reflect predictions of future events and trends and do not relate to historic events. They’re subject to known and unknown risks, and future events may result in different 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’d like to turn the call over to Bruce.

Bruce Flatt: Thank you, Jason, and welcome, everyone, on the call. Our results were strong in the third quarter, and our capital-raising momentum is building. Our fee-related earnings grew to $565 million and distributed earnings to $568 million, each representing a year-over-year growth of 8%. The resiliency of our results in the current macroeconomic environment demonstrates the quality and diversity of our cash flow streams. This durability stems in large part from the fact that 86% of our capital is long-term or perpetual in nature, driving the overwhelming majority of our fee-related earnings. Today, essentially all of our distributable earnings come from these highly predictable fee-related earnings. Earnings stability is further bolstered by our ability to raise capital from institutional investors around the world and invested across our five diversified businesses that represent essential and growing parts of the global economy.

Turning to overall markets, central banks have made significant progress in lowering headline inflation while trying to navigate a soft landing for the economy. Market participants increasingly believe the current rate-hiking cycle has crested. And while the move in rates has been historically sharp, the absolute level of interest rates is still relatively low as compared to historic levels, and at a level where we have operated and grown successfully for many years, and for what we do does not impact the success of our business. On the contrary, the advantages we derive from the broader Brookfield ecosystem allow us to invest across all market cycles and in all economic environments. When markets are more uncertain, businesses must differentiate themselves by providing attractive returns, and investors like us who have capital put to work and that can underwrite with conviction find better opportunities than in most other markets.

There has been no shortage of uncertainty and volatility this year, but we have continued to execute. We have committed to over $50 billion of new investments at very attractive value entry points, while also being very active on the monetization front, selling some of our de-risked and mature assets. We currently have over $100 billion of dry powder from uncalled fund commitments to invest into attractive opportunities across the business. Our fee-bearing capital stood at $440 billion at the end of the quarter, and assets under management are now $865 billion. This scale, partnered with the interconnectivity of our businesses, enables us to spot trends early, source proprietary deal opportunities, underwrite with accuracy, drive better operations and have best-in-class access to capital.

At the same time, we continue to drive fundraising, with inflow of $61 billion year-to-date, including $26 billion in the third quarter, which represents our strongest fundraising quarter for the year. This sets us up nicely for what we expect to be a strong next few months towards our $150 billion capital-raising target. We expect to hold several meaningful fund closes and anticipate completing our contract to manage the assets of AEL within the coming months. We are fortunate that the businesses in which we have a leadership position remain very much in favor with global investors. In fact, our latest flagship infrastructure fund, our infrastructure debt fund, and our transition energy fund should represent the largest funds ever raised by any sponsor for each of these respective strategies.

We are also very pleased that the sixth vintage of our flagship private equity strategy held its final close at $12 billion, making it the largest private equity strategy that we have ever raised. At the same time, we are raising significant capital across a number of private credit funds, seeing strong interest for our flagship real estate fund as opportunities are starting to surface in real estate. Our strong fundraising success this year should lead to strong revenue growth next year and at the same time, direct cost growth should slow as much of the necessary investments have been made in the platforms we have. The combination of faster revenue growth and slower expense growth should mean next year should be a very strong year for FRE and DE growth.

Our ability to succeed at this time, in part due to our business is being positioned around three global trends that we have talked about before, decarbonization, deglobalization and digitalization, is very important. Decarbonization is at the heart of global initiatives to reach a net zero carbon economy. Of course, this work is taking place within our renewable, power and transition businesses. The decarbonization goes beyond just cleaning our energy sources. We are also leveraging our expertise to actively reduce the carbon footprint of virtually every asset that Brookfield owns globally. Notably, some of our most ambitious decarbonization efforts are rooted within our infrastructure and our private equity businesses. Within deglobalization, international supply chains have started to decentralize and are turning to more regional focused operations.

We have the global footprint, expertise, relationships and operational boots on the ground to understand local requirements and meet these logistical challenges wherever they may be. We have capabilities to meet supply chain needs from ports, toll roads, rails, logistical facilities, and now with the recent acquisition of Triton, we are also now the largest owner and lessor of intermodal shipping containers to move these goods globally. And last, there is a very large need for significant investment in digital infrastructure around the world. Said very simply, this is what is behind your phone. Data is the fastest growing commodity and like any commodity, it needs to be processed, transported and stored. AI is also starting to have a dramatic impact on usage of data centers and power and is only at its infancy.

We are creating end-to-end capabilities from data tower transmission, fiber and data center storage. The need to satisfy these three investment areas will inevitably require many trillions of capital investment. This should serve as a tailwind for our businesses for years to come. All of this is alongside the growing opportunity we see in private credit, which Connor will speak to shortly. These combined items are what allow us to confidently state our five-year targets of doubling distributed earnings to $5 billion and growing our fee-bearing capital to over a trillion dollars. Thank you for your continued support and interest in Brookfield Asset Management. With that, I’ll turn the call over to Connor.

Connor Teskey: Thank you, Bruce, and good morning, everyone. We wanted to take some time today to spotlight our private credit business and capabilities. While we’ve talked about our private credit before on both our conference calls and at our Investor Day, we continue to believe that it is an underappreciated part of our story. Today, we have a total of approximately $150 billion of fee-bearing capital in credit funds across all of our businesses. This includes credit strategies within infrastructure, real estate and private equity, as well as credit strategies within our Oaktree and LCM platforms. Of this figure, $60 billion represents private credit in long-term funds, which excludes any of the liquid high-yield bond or credit strategies that Oaktree manages and pro forma, the AEL transaction, that $60 billion figure will increase to $140 billion, inclusive of our insurance assets under management.

Together, this makes us one of the largest private credit managers today and gives us distinct and meaningful advantages in this space. In the areas of infrastructure, renewable power, transition and real estate, we have a vast footprint and extensive experience in relationships, enabling us to source proprietary deal flow and have better insights when underwriting. In addition, our partnership with Oaktree, the premier name in credit for over 30 years, gives us extremely valuable access to data and deal flow. We have been aggressively investing in our team and platform to ensure that we are well positioned to take advantage of what is a secular change in the role of private credit broadly within the capital markets. To capture this opportunity — to capture the opportunity we see in private credit, we have bolstered our investment capabilities to support increased origination activity, we have expanded our geographic reach to gain local intelligence, and we have launched new product strategies.

We are seeing the benefits of this in our fundraising figures. Over 40% of the capital we have raised year-to-date has been from private credit and insurance and looking ahead, we expect that credit and insurance will be the biggest contributors to our fee-bearing capital and our fee revenue growth over the next five years. In the current environment, our LPs are realizing that they can earn double digit returns investing in credit. In fact, as credit risk return profiles have become more attractive, we have seen traditional fixed income investors increase allocations to private credit, and we have even attracted interest from investors that have historically focused on equity investments. Turning to some of our platforms, within infrastructure and renewable power, the pullback among traditional lenders is happening during a period of unprecedented capital need to build out renewables, data centers and fiber infrastructure capacity.

Last week, we announced the closing of our third infrastructure debt strategy at $6 billion, making it more than twice as large as the predecessor fund and the largest infrastructure debt fund ever raised. Few others can operate at the scale, breadth and credibility we can within the broad investment scope of this fund. That means our capital has less competition, enabling us to generate attractive risk premiums while being highly selective in maintaining robust covenant protections. This fund is already 50% deployed, as we’ve seen the cadence for deployment accelerate. Given this pace of deployment, we could be in a position to launch the next vintage as soon as next year. Now turning to real estate, within commercial real estate, securitization markets remain slow, though issuance has started to pick up in September and October.

Nevertheless, the vast pools of commercial real estate loans that are maturing over the next 12 months to 24 months will face a thinner pool of capital available for refinancing. Real estate investors who lack deep relationships with large institutional investors will be looking for solutions. Combined with the broader trends around the availability of traditional lenders, the deficit of liquidity will create a very attractive lending environment for sponsors with significant dry powder like us. We are not the only one — we are not only one of the most experienced real estate investors in the world, but we also have one of the longest running private debt platforms in commercial real estate, as we have been providing credit solutions for more than two decades.

Our next CRE mezzanine debt fund, which will be our seventh vintage, should be larger than the sixth, which was $4 billion, but our ability to put capital to work at scale far exceeds the size of this fund. This year we committed to a $1 billion loan, sold off the senior mortgage, retained a portion of the MEZ, and utilized our strong relationships to manage the rest on behalf of co-investors. This is only the start of where this and our other lending businesses are heading, as a one-stop shop for credit. And lastly, turning to Oaktree and LCM, within our corporate lending and opportunistic debt strategies, the magnitude, quality and breadth of deployment opportunities are approaching past periods like those immediately following the GFC and the start of the coronavirus pandemic.

We expect this trend to continue as rates remain elevated from where they were. We have raised $23 billion at Oaktree this year, and are seeing strong demand for both the Flagship Opportunity Fund and also their inaugural Lending Partners Fund, which focuses on large-scale direct origination. Size matters and the ability to provide sizable capital solutions, particularly where complexity is high, favors investors like us and Oaktree and we continue to see this across a wide set of opportunities. Within private assets, Oaktree’s opportunistic pipeline is approximately $8 billion and the performing pipeline is approximately double that. At the same time, at LCM, our European consumer lending business, our latest $4 billion Flagship Credit Opportunity Fund has earned over 15% returns this year, and it should also be a record year for deployment.

The team is preparing to launch the next vintage of the fund in the latter half of next year, and our initial estimate is expected to be meaningfully larger than the current vintage. LCM’s specialty finance strategy is also seeing strong demand, and the team has plans to launch a number of complementary credit strategies over the next 12 to 18 months. We will conclude by saying that we are already one of the largest private credit investors today, and we have several powerful engines that will propel and accelerate this part of the business over the next five years to 10 years. The platform we have developed, combined with a significant pool of fresh capital to put to work, are significant advantages. Our team has never been broader, and our capability is never bigger.

We expect to organically grow our credit platform fee-bearing capital by more than $150 billion to $300 billion over the next five years. In addition, we expect to grow our insurance solutions business by $200 billion over the same period, and we will direct a large part of that capital into private credit funds, further expanding our capabilities. With that, let us turn it over to Bahir to discuss our financial results.

Bahir Manios: Great, thank you Connor, and good morning. I’ll start off by covering our quarterly financial performance, touch on our continued strong fundraising efforts and then wrap up with some quick remarks on our financial position. Let me first cover off our financial performance in the third quarter. We reported fee-related earnings, or FRE, of $565 million in the quarter, or $0.35 per share, which brings our FRE to $2.2 billion for the last 12 months, representing growth of 13% over the prior 12-month period. Our distributable earnings, or DE, for the quarter was $568 million, or $0.35 per share. This brings our DE also to $2.2 billion for the last 12 months, and represents a 12% increase over the comparative period once you exclude the impact of performance fees that were earned in the prior 12 months.

Our results in the quarter benefited from capital raising done in the period predominantly coming from our infrastructure, real estate, and private equity flagship funds that contributed $23 million of incremental fee revenues in the quarter, and increased fee revenues from our various credit strategies, where we’re seeing opportunities to put capital to work at increasingly attractive risk-adjusted returns. In total, we deployed over $5 billion of capital during the period across a number of our credit strategies. Margins for the quarter were solid, coming in at 56%, which was in line with the previous two quarters of the year. Margins for the 12-month period were also in line with the prior year. Our results in the quarter were impacted by the market volatility that impacted the share prices of our publicly listed affiliates, Brookfield Infrastructure Partners, and Brookfield Renewable Partners, both of which traded down in sympathy with the broader infrastructure, utility, and renewable power sectors that traded lower recently in large part due to the perceived effect of interest rates on these securities, and some discrete issues impacting certain market participants.

While the Brookfield-listed entities were not directly impacted by these issues, their share prices were lower. In order to align our interests with our shareholders, we charge our listed entities a management fee based on their market capitalization, and as such, total fees charged to those entities were lower in the period. We have strong conviction about the business prospects of both BIP and BEP. These are exceptional businesses that have very strong underlying business fundamentals, solid balance sheets, excellent multi-decade track records of growing cash flows and dividends, and both have attractive and achievable FFO and distribution growth targets, both companies gave very strong guidance at their respective investor days in September and announced robust earnings this past week.

We believe both companies’ recent share prices will ultimately rebound as they continue to execute on their business plans. I’ll now move on to speak about our fundraising efforts. As Bruce noted in his remarks, through the first 10 months of the year, we raised a total of $61 billion of capital, including $26 billion in the third quarter. Some of the highlights in the period include, within our infrastructure business, we closed on $3 billion of capital for our fifth flagship fund, bringing the fund size to more than $27 billion, making this the largest infrastructure drawdown fund ever raised. We anticipate holding the final close for this fund before the end of the year, and once all is said and done, we expect to get to our hard cap of $28 billion.

Based on the current size of the fund, we have committed or invested over 40% of this fund. Also within our infrastructure business, we held the final close for the third vintage of our infrastructure debt fund last week, raising $1.3 billion of capital since the beginning of the third quarter and bringing the total capital raised for the strategy to $6 billion. This is the largest infrastructure debt fund ever raised, and it’s double our previous vintage fund size of $2.7 billion. Also worth noting here that we’ve already deployed 50% of the commitments to this fund. In private equity, we held the final close for our sixth opportunistic private equity fund of a little over $700 million in September, bringing the total strategy size to $12 billion.

This vintage represents the largest private equity fund we’ve ever raised, which is a testament to our strong track record and longstanding investment approach focused on high-quality cash-generative essential businesses. In real estate, we continue to see strong demand for our flagship fund in this current market environment, and we closed on an additional $2 billion in the quarter for the strategy. We continue to progress first-close commitments and expect to finalize the first close for this vintage during the fourth quarter. Within our credit business, we raised a total of $11 billion in capital since the beginning of the third period for a number of key credit strategies. Most notably, we raised over $3 billion for the 12th vintage of our opportunistic credit fund, bringing the size of that fund to over $6 billion.

On to our outlook, I’d like to provide a few observations. Over the next few months, we expect our momentum on the capital-raising front to pick up significantly as we work towards achieving our stated goal of raising close to $150 billion of capital before we announce our results for the fourth quarter of the year and heading into 2024, this strong fundraising sets us up for strong earnings in 2024. We also expect our margins to expand, and these two items combined sets us up very nicely to deliver an excellent year from an earnings and dividend growth perspective. Before I wrap up my remarks, I’d like to make a few comments on our balance sheet. Our balance sheet is debt-free, and we currently hold close to $3 billion of net cash and equivalents.

This fortress balance sheet is a source of strength for our business, and by using it selectively and effectively, we should be able to drive growth in our asset management activities over and beyond our stated goals. We may utilize our balance sheet to launch new fund strategies and business lines or to make a strategic acquisition to bolster our existing capabilities and in light of our strong financial position, I’m pleased to report that the board of directors has declared a dividend of $0.32 per share payable on December 29, 2023 to the shareholders of record as of the close of business on November 30. 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?

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Q&A Session

Operator: [Operator instructions] Our first question comes from the line of Cherilyn Radbourne from TD Cowen. Please proceed with your question.

Cherilyn Radbourne: Good morning. I was hoping you could start by giving us some color on what you’re seeing in terms of consolidation among, excuse me, subscale alternative managers in this environment and whether that’s something you continue to monitor with a view to possibly having an opportunity to round out your capabilities in select areas.

Bruce Flatt: Hi, Cherilyn. Thank you for the question. You’re absolutely right. We continue to see a broad-based trend towards consolidation in the alternative asset management space and I think it’s important to recognize that this is coming from both sides. First, on the client side, similar to what we’ve been seeing for years, increasingly clients are concentrating their capital with large-scale reputable managers that can offer them a full suite of products and solutions across the alternative space and no doubt, Brookfield Asset Management has been a beneficiary of that as we’ve broadened our product suite in recent years. But I think it’s also important to recognize that the trends towards consolidation are also being driven by the managers themselves.

Increasing requirements in compliance and the required level of customer service is much easier to do when you are part of a scale manager that can amortize the cost and requirements of those functions across a much broader business. Also increasingly, for smaller scale managers, having a large depth of talent, a large number of men and women to choose from, also helps with succession planning, and that’s a driver of consolidation in the space as well. So in terms of the trends, we continue to see consolidation amongst the alternative asset managers and to the comment you made in your question, we are actively monitoring a number of situations, but similar to what we’ve said on previous calls, we are going to continue to be very, very selective.

We have a great business that has a fantastic organic growth trajectory and while we are monitoring a number of situations, we will only pull the trigger on ones that are additive to our business, accretive to our cash flows and really round out our product suite and give us something we don’t already have within the business.

Cherilyn Radbourne: Then with respect to insurance, we’re looking for an update on how much of BAM’s insurance AUM has been committed versus deployed to BAM and Oaktree strategies to date, and how you would expect that to evolve and impact FRE over the next 12 months?

Bahir Manios: Good morning, Cherilyn. It’s Bahir. Maybe I’ll take a stab at that one. So of the $28 billion of assets that we’re managing on behalf of Brookfield Insurance Business, we’ve deployed so far about $2 billion into a number of our private credit strategies. A further $7 billion has been committed and will probably start being deployed or invested, and as such, contributing to our results over the next 24 months and so maybe over the — I think your question was over 12 months, so maybe half of that. And if you do the percentages, that takes you to 30%, 32%, and we’ve got a path to get commitments up to our targeted range, which is 35% to 40%, which we’re going to do in the next few months or so.

Cherilyn Radbourne: Thank you for the time.

Operator: Our next question comes from the line of Alexander Blostein with Goldman Sachs. Your line is now open.

Alex Blostein: Hi, good morning, everybody. Thanks for taking the question as well. I want to maybe start with an outlook of fundraising. 2023 was obviously a very strong year for you guys, and it’s nice to see you reiterating the targets here, I guess, $150 billion, including AEL. Any thoughts on what ’24 will look like in terms of fundraising once you’re through some of these larger flagship funds?

Bruce Flatt: Certainly. Thanks for the question, Alex. When we think about the remainder of the year and walking into next year, it’s a very constructive outlook from a fundraising perspective. We’re at $61 billion year to date. We’re going to pick up $55 billion when we complete the previously announced insurance transactions and that obviously leaves approximately $35 billion for us to do over the remainder of the year. That compares versus $26 billion we did in the last quarter and we’d make two comments there. One, it’s not unusual for fundraising to be tilted towards the back end of the year. That’s pretty common practice for us and two, as we move into the back end of the year, we expect to have the first close of our transition fund, our flagship real estate fund, and two of Oaktree’s flagships are really at the peak of their fundraising and in addition to that, we get our typical co-invest and other complementary strategies as well.

So most of the way to that $150 billion is very visible through insurance and flagship strategies. And then when we roll into next year, we’ve often communicated a run rate range of $70 billion to $100 billion of fundraising every year and the great news as we roll into 2024 is we expect to not only have the full range of complementary strategies in fundraising, we will also have meaningful closes of those Global Transition Fund, Real Estate Fund, and the two Oak Tree funds that will continue fundraising well through the midpoint of next year. So I would say, well, it may not be the record year that we had in 2023, the outlook for fundraising in 2024 is very robust and we expect another extremely strong year.

Alex Blostein: Great, that’s helpful, thanks. My second question is around insurance and some of the regulatory dynamics coming out of DOL last week and I appreciate the fact that you guys obviously don’t own AAL yet, but maybe just kind of help frame what the proposed rule, if it goes through as kind of written, what does it mean really for the business? Obviously, the new details have been pretty strong for the industry, but maybe help break down the channels where AL, but as well as your other insurance subsidiaries sell through, just to kind of better give us a sense of any impact on growth sales there, thanks.

Bruce Flatt: Certainly, so it’s still early days on this, but I think the important thing to recognize is demand continues to grow for fixed index annuity products. That’s really what our insurance business specializes in and this is evidenced through the strong sales growth we’ve seen both this year and we expect in the coming years. I’d say the proposal is still pretty early in its review process, but the biggest takeaways of it is if passed in its call it written form, we would expect demand and sales to continue to be strong across the platform, but what we would really expect is the new regulatory environment to increasingly favor large players in the space, which is what we have become. It increasingly will favor those players with the scale and capital to easily comply with the new regulations while still capturing the significant demand growth. So while we do monitor the situation closely, we feel our business will be well positioned.

Alex Blostein: Great, thank you very much.

Operator: Thank you. Our next question comes from the line of Geoff Kwan with RBC Capital Markets. Your line is now open.

Geoff Kwan: Hi, good morning. My first question was just with some of the recent announcements on new funds in partnership with SocGen and Sequoia, can you talk about what kind of opportunity there is to partner with third parties to help create and distribute new strategies?