Brookfield Asset Management Ltd. (NYSE:BAM) Q4 2022 Earnings Call Transcript

Brookfield Asset Management Ltd. (NYSE:BAM) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Good day and thank you for standing by. Welcome to the Brookfield Asset Management 2022 Q4 Conference Call and Webcast. Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Managing Partner, Branding and Communications, Suzanne Fleming.

Suzanne Fleming: Thank you, operator and good morning everyone. Welcome to Brookfield Asset Management’s first earnings call. On the call today are Bruce Flatt, our Chief Executive Officer; Connor Teskey, President of 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: Thank you, Suzanne. Welcome to everyone on the call and welcome to the new Brookfield Asset Management. This is our first earnings call since we completed the distribution and listing of 25% of the asset management business in December, which is now trading under the symbol, BAM. 2022 was a record year for our business. We raised $93 billion of capital. Our fee-related earnings increased by 25%. And our assets under management currently stand at nearly $800 billion. Bahir Manios will go through our operating and fundraising performance in more detail in his remarks. The global macro environment in the past year was characterized by several key dynamics, driving market uncertainty and volatility, namely elevated levels of inflation and corresponding interest rate increases.

Although inflation appears to have peaked in most countries, it is possible that certain structural dynamics prove harder to abate, such as the effects of deglobalization, energy security and a tight supply of skilled labor. This may result in continued near-term volatility and downward pressure on corporate earnings, which have cyclical exposure. However, at the same time, the recent reopening of markets in Asia has increased both supply and demand for goods and services on a global scale, also providing a boost to the world economy. This uncertainty also resulted in volatility within the public markets, which in many ways underscored the value of a highly diversified portfolio with exposure to alternative investments. Our business proved its resiliency over the past year.

Connor Teskey will speak more about what our strategies are focused on today. But at a high level, we have aligned our business around the dominant global secular trends of digitization, deglobalization and decarbonization that we believe will require trillions of dollars in investment over the next decades. These trends will be extremely beneficial for our market leading infrastructure renewables and transition strategies. As a reminder, we own one of the largest portfolios of inflation protected assets in the world. Our underlying businesses are essential in nature and therefore continue to generate stable and growing cash flows throughout cycles. These assets are highly cash generative with high margins and are largely inflation protected, hence are very attractive to investors through market cycles.

These factors combined with our focus on investing in high-quality assets and proactive asset management, have continued to strong performance in our underlying businesses despite broader market uncertainty. In addition, we expect the current economic climate will highlight the preeminence of our credit platform. Having one of the most sophisticated credit managers as part of our franchise diversifies our business makes us better investors and ensures that we can raise and successfully deploy capital at all points in an economic cycle. Lastly, I wanted to underscore that while the stock is new in the form of a standalone public company, our asset management business has been 25 years in the making. And this business has been vesting our own capital for over a century.

This heritage and long track record provides the foundation for our next phase of growth. Our scale track record over a long period of time is extremely valuable. It means that we are a beneficiary of the capital flows and are increasingly gravitating to the largest multi-asset class managers in a period of our industry consolidation. Our business is positioned around the leading secular global drivers of capital across renewable power, transition infrastructure, real estate and credit. We believe every day €“ we speak every day to the world’s largest institutions and the people that oversee the allocation of these pools of capital. These are the strategies they are highly focused on in this current environment. We have $175 billion of capital across the broader Brookfield organization.

This is our own discretionary permanent capital that can be invested along with the funds of Brookfield Asset Management. This is one of the benefits of the broader Brookfield structure and is unrivaled in the industry. Our business is highly diversified. This enables the business to continue growing and keep deploying capital through economic cycles. Each one of the business groups is highly specialized and setup to find opportunities in markets like we are seeing today. And finally, we take an immense amount of pride in the relationships we have built with our global group of more than 2000 clients. Delivering superior investment performance for our clients is extremely important. Equally as important though is consistently providing them with the highest level of service and constantly innovating to meet their needs.

Thank you for your continued support. And I will pass it over to Connor to talk about our themes for investing and a little bit about what we are currently focused on.

Connor Teskey: Thank you, Bruce and good morning everyone. As Bruce noted, the broader markets remain more volatile. However, dislocation in financial markets has historically created some of the most attractive risk adjusted investment opportunities for those investors who have dry powder to put to work. With approximately $90 billion of undrawn capital across our funds, it is shaping up to be a very interesting and active year from an investment perspective across the business. On today’s call, we want to focus on some of the themes we are seeing within both the renewables and transition platform and also the private credit sector. These are segments that will benefit from immense secular tailwinds and our market leading franchises are well-positioned to take advantage of the large and growing opportunity that is in front of us.

We will start off by discussing our transition strategy centered around the theme of decarbonization. In 2021, we closed a $15 billion fund called the Brookfield Global Transition Fund or BGTF which today is the largest fund globally that is focused on decarbonization and the transition to net zero. This fund took our transition franchise from 0 to $15 billion in just 18 months. And this is a space which represents a great opportunity to create long-term value for BAM. Thanks to significant macro tailwinds for the strategy and strong initial deployment that we have seen within the fund. We expect this business to scale to over $200 billion within the next 10 years. One of the reasons our investors have chosen to invest with us is because they recognize that in order to be a successful investor in decarbonization, it is essential to not only have access to capital, but to have deep operating expertise and market knowledge, particularly in power markets and renewables, both of which Brookfield has a proven track record in.

Through Brookfield Renewable, we have one of the largest €“ we are one of the largest investors in renewable power. We have almost $75 billion of assets under management and 135,000 megawatts of capacity in either operations or development stages around the world. That places Brookfield Renewable among the largest renewables companies globally, but the only one that is diversified across all major regions and all major clean energy technologies. We cannot underscore enough that having a capability in renewables is a critical prerequisite to success in transition investing. BGTF will make investments into emission reduction and emission avoidance projects worldwide. Transition investing provides us an opportunity to make a positive impact without taking any discounts on financial returns.

We are focused on investing in high-quality businesses and proven technologies, where we have strong cash flow visibility and downside protection and where we are able to exercise our significant control or influence to generate value under our ownership. In terms of focus, our investment strategy is unique in that we are willing to go where the emissions are. We will look to invest in and alongside some of the world’s hardest to abate, but critical sectors such as power, industrials, transport and energy. We want to provide a couple of examples to highlight the opportunity. In the power space, we are looking for opportunities where we can buy businesses that may have existing thermal generation with the goal to help them decarbonize. Our strategy will be to rationalize and convert some of that existing thermal capacity, while simultaneously leveraging our access to capital and development expertise to build out new renewables to provide clean power generation going forward.

In the industrial sector, we are seeing opportunities to partner with the largest corporates from around the world to provide capital at scale and expertise to transition their businesses to proven low carbon products and solutions that they will require to support their own net zero goals. Due to the large investment opportunity, which we estimate to be $150 trillion between now and 2050, we believe that BGTF will be just the first in a series of funds within the transition space. Given our pace of deployment, we expect that we will be back in the market in the near-term with our next fund. Further, we don’t expect our transition activities to stop at BGTF. We will look to continue to expand our product offerings as you have seen us do with other Brookfield verticals potentially through the launch of perpetual entities, credit funds and products specifically dedicated to our private wealth channel.

We are also seeing increased opportunities to leverage our industry leading decarbonization expertise to make more educated investments into a wider set of opportunities across the entire Brookfield ecosystem such as in infrastructure, private equity and real estate. Switching gears to private credit. Private credit is a sector that has been growing in importance since the global financial crisis, but more recently is playing a critical role for borrowers. Traditional sources of capital from the leveraged finance and bank markets are less accessible compared to a year ago. The outflows of capital in the leveraged finance market reflect concerns related to higher interest rates and the prospects of a recession in certain markets. Even though there is less debt available, the need for capital remains highly resilient.

Many industries like renewables and telecoms are continuing to grow quickly. Debt maturity walls cannot be ignored. And mergers and acquisitions continue, even if at a slightly slower pace. Therein lies the opportunity for us to play an even more valuable role as a one-stop shop with not only different types of equity capital, but also different forms of private credit to address the financing objectives of borrowers. Brookfield’s private credit businesses, including its real estate and infrastructure mezzanine debt platforms, its special investment platform within our private equity group and Oaktree have been filling a void created by the current market disruption while also achieving favorable market terms and structures. Brookfield’s strong track record of investing in real estate, infrastructure and private equity provides a deep understanding and our global reach and deep network of relationships translates this into attractive financing opportunities.

Especially in this environment, Brookfield’s flexible capital and ability to underwrite large investments, while offering speed and certainty of funding is a meaningful competitive advantage and highlights our importance as a key partner to borrowers. Private capital can deliver attractive risk-adjusted returns. Generally, investors benefit from lower default and higher recovery rates due to the thorough due diligence process and greater lender protections that derisk investments. As such, more investors are investing in private credit strategies. And we have seen this through the success we have had in raising capital for private credit funds across our verticals, including our Real Estate Finance Fund, our Infrastructure Debt Fund, and our Special Investment Fund that can provide the full envelope of capital solutions for corporates across all sectors.

That concludes my remarks for today. We will now pass it on to Bahir to discuss our operating and financial results.

Pixabay/Public Domain

Bahir Manios: Great. Thank you, Connor and good morning everyone. As this is our first quarter reporting to you on our financial results as a standalone company, I wanted to just take a minute to explain the basis of our presentation. Brookfield Asset Management, which we often refer to as our asset management business is owned 25% by the public via Brookfield Asset Management Limited, which trades on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol BAM, or BAM with the remaining 75% being owned by Brookfield Corporation. My remarks today will be focused on the results for Brookfield Asset Management at 100% €“ on a100% basis, which we believe is the most relevant way to describe our financial and operating performance going forward.

I wanted to cover off three things on today’s call. First, I will touch on our financial results for the fourth quarter and for the 12 months ended December 31, 2022. Second, I will provide an operations update focused on our fundraising efforts and end off by providing an outlook for the business and an overview of the key investment highlights for Brookfield Asset Management. So starting off on results, I am pleased to report this morning that our robust fourth quarter capped off an exceptional year for our business. We delivered strong financial results and exceeded a number of our fundraising targets that we set out for ourselves at the start of the year. This was all during a challenging economic backdrop and really showcases the resilience and fundamental strength of our business.

Fee-related earnings or FRE increased 26% before performance fees compared to the prior year, finishing the year with $2.1 billion or $1.29 on a per share basis. This was driven by an increase of 20% in our fee revenues over the year, which benefited from capital raised and deployed within our flagship strategies, growth in our perpetual strategies and capital deployed across our business. We also experienced a 200 basis point increase in our margins compared to the prior year as our teams showed discipline managing their cost structures and also we saw scale coming into play. Our margins for the year were 58%, which we expect to maintain in 2023 and onwards. Distributable earnings increased by 21% in 2022 before performance fees to all almost $2.1 billion or $1.28 per share, driven by the strong growth in FRE, which was partially offset by higher taxes for the year.

In the fourth quarter, FRE was $576 million or $0.35 per share and our distributable earnings were $569 million or $0.35 per share. Excluding performance fees recorded in the prior year, that are typically lumpy in nature. Our results were up 26% at the FRE level and 23% on a DE basis. Fueling this growth was an increase of 19% in base management fees, combined with some margin expansion, as discussed previously. On the operations front, we had a good quarter on the fundraising side. We raised a total of $14 billion of capital in the period capping off a record year as Bruce touched on earlier. We closed the year with $418 billion of fee-bearing capital, which increased by 15% compared to the prior year. In total, we raised $93 billion of capital this year, which is 30% higher than last year, resulting in a record year for our business.

We were very pleased to see that the capital raise this year was spread out very well across many of our strategies showcasing the great diversification that we have. Our flagship funds raised a total of $37 billion of capital benefiting from a record first close of $20 billion for our fifth infrastructure fund and a strong first close of $8.5 billion for our sixth private equity fund. We raised $11 billion from a number of our closed end credit funds namely our infrastructure debt fund and Oaktree’s life sciences lending and special situations funds. We also saw an increase in the assets that we managed for our insurance solutions business increased by $23 billion for the year. And finally, a total of $12 billion was raised across our various perpetual strategies, most significant contributor being our Infrastructure Super-Core strategy.

Looking ahead, we believe that the combination of developing global economic headwinds and ongoing public market volatility is creating a ripe environment for opportunistic investing and bodes well for several fund launches in 2023. Notably, we plan to commence fundraising for our fifth flagship real estate fund, our second special investments fund and our second transition fund, all in the first half of 2023. We also continued to build out our private wealth channel. Having recently launched our infrastructure income fund, we have been encouraged by the early indications we have received thus far. In addition and while not material to our overall portfolio, our non-traded REIT saw net positive inflows in the fourth quarter. Turning to the outlook, with respect to fee-related earnings, we are forecasting for yet another significant step up in our results for the few years ahead.

Our growth for the next 2 years is quite visible and is expected to be driven by: first, significant contribution from the latest vintages of our flagship funds that we have either started fundraising for or ones that we expect to launch in the first half of 2023; second, growth that we should continue to see from the continued expansion of our various perpetual strategies, most notably our Super-Core Infrastructure strategy that has been very successful to-date and where demand from investors continues to be strong; third, a significant step up in our credit business, where we expect to have a record year of fundraising in addition to growth fueled by our growing insurance solutions business. All-in-all, despite the volatility in the markets, we entered 2023 from a position of strength and have a great deal of confidence for the future of this business.

And it’s with this strong business backdrop we designed the new BAM Security to provide investors with direct access to our leading global asset management business. As a reminder, the new Brookfield Asset Management has the following key attributes. First, a cash flow stream that’s extremely resilient. Most of our $418 billion of fee-bearing capital is invested in long-term private funds that have perpetual or over 10-year life. Second, distributable earnings that are almost entirely made up of our stable and annuity-like fee-related earnings, making our cash flow generation profile simple to understand, stable and easy to predict. An asset-light balance sheet that is exceptionally strong with no debt and cash and financial assets of over $3 billion.

And finally, an expectation to return the vast majority of the cash that we generate in this business to our shareholders via dividends, and when it makes sense, stock buybacks. We believe the combination of these characteristics generates an excellent long-term investment for shareholders. This security should provide us with added additional optionality for acquisitions should the right opportunities present themselves. And lastly, before I conclude my remarks for the day, we are pleased to report that on the back of these excellent financial results, solid balance sheet and the strong outlook for the business, the board of Brookfield Asset Management Limited, declared a quarterly dividend of $0.32 per share payable on March 31, 2023 to shareholders of record as of the close of business on February 28, 2023.

That wraps up our prepared remarks for this morning. Thank you for joining the call. We appreciate the interest and we will open it up now for questions. Operator?

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Q&A Session

Operator: Thank you. And our first question comes from the line of Cherilyn Radbourne with TD Securities.

Cherilyn Radbourne: Thanks very much and good morning.

Bruce Flatt: Good morning, Cherilyn.

Cherilyn Radbourne: You mentioned in the letter that the alternative space is undergoing a period of consolidation and clearly fundraising has become more difficult for some. So I was wondering if you could give some color on the level of consolidation activity that took place last year, what you are expecting to see in 2023 and comment on BAM’s appetite to potentially add to its platform through M&A?

Connor Teskey: Sure, Cherilyn, it’s Connor. I will take that one. In terms of consolidation within the space, the place where we are seeing this most obviously is we are increasingly seeing large institutional LPs looking to concentrate their capital amongst a smaller number of managers, but those managers who can offer them a greater diversity of products. And we certainly feel that we have been the beneficiary of that in the last 12 to 24 months as we have rounded out our portfolio increasingly, not only with our flagships, but also our complementary products, whether they be our debt products, our perpetual funds, and increasingly funds that cater to the private wealth channel. We do expect this to continue in the coming years.

And perhaps this is one of the reasons why we have such a robust and positive outlook for fundraising in 2023 when we know that there are some pockets of weakness for other market participants. Maybe just turning to the second part of your question around appetite for M&A, obviously, with the spin out, we now have a currency that we could use for inorganic growth. And these are opportunities that we are going to continuously monitor and review in the market. But similar to how we have in the past, we intend to be very, very selective when we want to enter into a new space, it is always a build versus buy decision for us and which can we do more creatively. And from there, a potential partner or a potential target for inorganic growth needs to be scalable and needs to add something to our platform that we don’t already have.

So, we will continue to monitor the market and we will look for those opportunities, but we do expect to be selective going forward.

Cherilyn Radbourne: Okay, that’s helpful. My second question relates to the transition fund where I think the relatively rapid pace of deployment has surprised investors to some degree. So thank you for the added detail on that. Maybe you could go a bit further and just give us some color on the composition of that portfolio across the various buckets that you outlined in your prepared remarks and where those various buckets sit relative to each other on the risk return spectrum?

Connor Teskey: Certainly. So, as it pertains to the transition strategy and BGTF1, what we would say is that the product launch was very successful, but perhaps what was even more successful was just the number of very attractive opportunities that came our way. As we were the market leader with the largest pool of capital focused on these types of de-carbonization opportunities. And when we look at that portfolio today, it was invested amongst great themes that were thrilled to have deployed capital into, there’s a large component of that portfolio that is focused on U.S. renewable power developers that are benefiting from the IRA today, there’s the acquisition of Westinghouse, which is benefiting from the significant tailwinds for nuclear.

And we’ve also put together a very, very attractive portfolio of new de-carbonization solutions, whether it be carbon capture, battery storage, or recycling. It’s that confidence that €“ sorry, it’s that execution and the number of opportunities that we’ve seen that gives us confidence that we will be back in the market for the next vintage of that fund sooner rather than later. And then to your question around, what other complementary products will we look to add? We’re going to start by looking to get the next version of the flagship out into the market, but from there, we would expect that over time, we will be able to offer the full suite of complementary products similar to what we’ve done in our infrastructure, and real estate businesses.

We think this theme is well positioned for both credit and a perpetual strategy, but those will come in future years.

Cherilyn Radbourne: Great. Thank you for the time.

Operator: Thank you. And our next question comes from the line of Alexander Blostein with Goldman Sachs.

Alexander Blostein: Hi, good morning. Thanks for taking the question and congrats on that spin off. Maybe we could start with real estate. There are two sort of broader questions I was hoping to drill into one on the opportunistic side and one on the core side. So it’s €“ as you pointed out, you have deployed a lot of capital out of Fund IV pretty rapidly and highlighted you will be back in the market with Fund V later this year. Real estate market is still quite uncertain, lots of skeptics out there obviously on the direction of travel there. So what’s the pitch to your LPs today on why to commit to opportunistic real estate in current environment? And as we look back at the track record, there hasn’t been a ton of capital return from private to do so. To what extent could that be a hurdle, as you are kind of thinking about sizing up the next one? And then I’ll €“ my follow-up will be on the core side.

Connor Teskey: Bruce, if there’s anything you’d like to add, at that point all at hand to you. In terms of the pitch on opportunistic real estate, we would say it’s pretty simple. Our real estate business, which is one of our longest running franchises has traditionally found the best opportunities and done its best investments in uncertain environments like the ones that we are entering into. So the fact that maybe the direction of travel is a little bit uncertain to use your words is actually the opportunity that is created for this vehicle, and we do think will provide a number of very, very attractive risk adjusted return opportunities. This said in another way we think the market dynamics actually play to our strengths.

When it comes to monetization, I think there’s €“ you’re highlighting a dynamic in real estate, but it’s an important dynamic, I would say across all of our strategies, which is because we have continued to scale our flagship funds and expect to continue to do so going forward. The assets that we are selling out of predecessor funds in the total quantum of investments that we need to sell out of those funds, is actually very modest compared to the new funds that we are raising in the capital we are putting to work. That is why we have such conviction about the future growth in our fee related earnings, but the other point we would highlight is while there is some market uncertainty that is making some asset classes a little bit more difficult to monetize across our real estate or infrastructure or renewable funds, we truly own best in class assets and best in class businesses.

And those are the assets that we are seeing more robustly hold their value in this market, and are more easy to monetize. So we do expect next year to be an active year, both on the investment side and the monetization side. Bruce, anything you would add? Bruce’s good. Okay, Alex, your follow-up?