Author Topic: BAM - Brookfield Asset Management  (Read 519779 times)

Packer16

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Re: BAM - Brookfield Asset Management
« Reply #1070 on: August 24, 2019, 02:16:18 PM »
While in theory I agree with you, I think in practice what most folks fail to realize is that most likely the estimated NAV will never be realized.  Once you see that & understand the assumption used to build up the NAV are not conservative but middle of the road, the SOTP story becomes less appealing.  In reality there should be a discount on the sub that BAM holds because you do not have the option to sell them.  The only way to reduce the SOTP discount is to spin off the subs & let the market value the AM by itself.  I do not think this will happen & thus I like the most advantaged sub BIP.  If I thought the spin-off was going to happen, I would invest in BAM also.  BTW if you look at the past returns, BIP has outperformed BAM quite significantly which I think will continue.

I would not let the partnership fees bother you are you are only paying about 18% of the appreciation in fees for BIP while you are paying more as percentage of return for the less advantaged subs.  For most alt managers, 20% of the return is low.

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vince

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Re: BAM - Brookfield Asset Management
« Reply #1071 on: August 24, 2019, 02:52:53 PM »
I'm not totally convinced that the NAV discount has/will hold at all times.  I'm almost positive that BAM was trading much closer to intrinsic value in early 2015 relative to today.  But even if we assume you are right and also assume the future discount stays roughly constant with today's, then their stock market value should proportionally increase in line (obviously not a straight line) with intrinsic value going forward.  Additionally, going forward, Bam's invested capital value is going to continue to diminish as a % of total value which would also diminish the discount as a percent of total value.  I also want to point out that I haven't done as much work on BAM as I do for many other investments so my argument could be factually wrong and I want to be clear that I like the partnership that you prefer, over the others, and It's still a close call compared to BAM in my mind.  Could you also be so kind and explain how you are only paying 18% of the appreciation? Thanks.

Packer16

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Re: BAM - Brookfield Asset Management
« Reply #1072 on: August 24, 2019, 03:34:14 PM »
In terms of discount, BAM has never traded at a premium & only rarely do any companies trade at premium.  There is no reason to trade at NAV or a premium due to the disadvantages of not being able to sell the components & also there are holding company costs (for BAM if we capitalize these cost at 10% it implies about a 6% discount).  Even companies with great allocation like Exor trade a discount which in theory should be able to offset some the discount.  I take this as a fact of life.  I think the assumption of a constant discount is not something you can take for granted (especially if the firm has a low distribution yield).  The discount could increase but we do not know.  A distribution yield IMO will put a floor on the price when a shock happens due to interest rates also going down when a shock hits. 

The 18% (should be 16% if from inception) is equal to total costs/total returns.  So for BIP total historical costs have been 3% of NAV per year & its total after-fee return has been 18.5% since inception (2018) which is about 16.2%.  BAM has increased by about 12% over the same period of time. 

I also considered whether BIPs performance was repeatable vs. BAMs.  Given, the advantages BIP had I thought that BIP would do better than BEP & was not sure about BBU.  Given that BBU has more of the risky deals & has changed it expected returns from 15 to 20% to 15% & BIP had higher historical returns than 15% (a proven track record), I favored BIP.  Now BAM may return more than BIP but a few thing have to go right for that to happen.  First, the discount has to decline or at least not increase.  Second, the assumed multiples for recurring fees of 20x and 10x for carry have to stay the same or increase. Thus for BAM to do better more things have to hold than for BIP to repeat history.  IMO the more things that have to go right for an investment to do well, the less confidence I have in the thesis.  I also look at infrastructure as Brookfield's core competence & where I would make a bet that they would do better going forward.  Just my 2 cents.

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vince

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Re: BAM - Brookfield Asset Management
« Reply #1073 on: August 24, 2019, 05:59:50 PM »
In terms of discount, BAM has never traded at a premium & only rarely do any companies trade at premium.  There is no reason to trade at NAV or a premium due to the disadvantages of not being able to sell the components & also there are holding company costs (for BAM if we capitalize these cost at 10% it implies about a 6% discount).  Even companies with great allocation like Exor trade a discount which in theory should be able to offset some the discount.  I take this as a fact of life.  I think the assumption of a constant discount is not something you can take for granted (especially if the firm has a low distribution yield).  The discount could increase but we do not know.  A distribution yield IMO will put a floor on the price when a shock happens due to interest rates also going down when a shock hits. 

The 18% (should be 16% if from inception) is equal to total costs/total returns.  So for BIP total historical costs have been 3% of NAV per year & its total after-fee return has been 18.5% since inception (2018) which is about 16.2%.  BAM has increased by about 12% over the same period of time. 

I also considered whether BIPs performance was repeatable vs. BAMs.  Given, the advantages BIP had I thought that BIP would do better than BEP & was not sure about BBU.  Given that BBU has more of the risky deals & has changed it expected returns from 15 to 20% to 15% & BIP had higher historical returns than 15% (a proven track record), I favored BIP.  Now BAM may return more than BIP but a few thing have to go right for that to happen.  First, the discount has to decline or at least not increase.  Second, the assumed multiples for recurring fees of 20x and 10x for carry have to stay the same or increase. Thus for BAM to do better more things have to hold than for BIP to repeat history.  IMO the more things that have to go right for an investment to do well, the less confidence I have in the thesis.  I also look at infrastructure as Brookfield's core competence & where I would make a bet that they would do better going forward.  Just my 2 cents.

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All fair points.  We still have some differences in thought, I really believe that in 7-8 years, and more so afterwords the asset management business will represent the lions share of earnings, cash flow, and intrinsic value making NAV much less relevant.  I'm pretty sure you have seen the supplementals showing the 5 year "value plan" trajectory comparing the 2 components.  It is striking...and absolutely consistent with their intentions going forward. I am also certain that Bam's ownership interests in the partnerships will get diluted in time.  However, I have a much better understanding, and appreciation of holding company discounts that I lacked before reading this thread and especially some of your earlier posts that went into detail regarding NAV discounts, much appreciated.

Spekulatius

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Re: BAM - Brookfield Asset Management
« Reply #1074 on: August 25, 2019, 08:28:03 AM »
While in theory I agree with you, I think in practice what most folks fail to realize is that most likely the estimated NAV will never be realized.  Once you see that & understand the assumption used to build up the NAV are not conservative but middle of the road, the SOTP story becomes less appealing.  In reality there should be a discount on the sub that BAM holds because you do not have the option to sell them.  The only way to reduce the SOTP discount is to spin off the subs & let the market value the AM by itself.  I do not think this will happen & thus I like the most advantaged sub BIP.  If I thought the spin-off was going to happen, I would invest in BAM also.  BTW if you look at the past returns, BIP has outperformed BAM quite significantly which I think will continue.

I would not let the partnership fees bother you are you are only paying about 18% of the appreciation in fees for BIP while you are paying more as percentage of return for the less advantaged subs.  For most alt managers, 20% of the return is low.

Packer

Even if you spin off the subs , the discount will persist, because they are limited partners and dont control their destiny (the GP  BAM does). To eliminate the discount you would also have to eliminate the cash stream to the GP. In this case, the GP would ask for compensation in more LP units, just like IDR were eliminated in certain midstream LPs (MPLX, PSPX). The GP/LP structure is worse for the  LP from a governance structure compare to a c-Corp or self managed REIT and deserves to trade at a discount.
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John Hjorth

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Re: BAM - Brookfield Asset Management
« Reply #1075 on: August 25, 2019, 09:01:48 AM »
Just a question for Keith here,

When you are mentioning "holding company costs", are you then referring to:

"Corporate costs" in the BAM Financials [2018 Annual Report, p. 31 & Income statement], disclosed as :

2018 : USD 104 M,
2017 : USD   95 M &
2016 : USD   92 M?
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vince

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Re: BAM - Brookfield Asset Management
« Reply #1076 on: August 25, 2019, 09:45:54 AM »
One other thought that popped up last night, many of the alternative asset managers are undervalued right now (kkr being one) and I dont believe they have a similar to Bam NAV component.  And many of the executives of these undervalued entities have blamed the undervaluation on the carried interest stream.  Not saying they are right necessarily, but it seems like a possible alternative reason that can be applied to Bam? Just thinking.

Packer16

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Re: BAM - Brookfield Asset Management
« Reply #1077 on: August 25, 2019, 09:48:06 AM »
While in theory I agree with you, I think in practice what most folks fail to realize is that most likely the estimated NAV will never be realized.  Once you see that & understand the assumption used to build up the NAV are not conservative but middle of the road, the SOTP story becomes less appealing.  In reality there should be a discount on the sub that BAM holds because you do not have the option to sell them.  The only way to reduce the SOTP discount is to spin off the subs & let the market value the AM by itself.  I do not think this will happen & thus I like the most advantaged sub BIP.  If I thought the spin-off was going to happen, I would invest in BAM also.  BTW if you look at the past returns, BIP has outperformed BAM quite significantly which I think will continue.

I would not let the partnership fees bother you are you are only paying about 18% of the appreciation in fees for BIP while you are paying more as percentage of return for the less advantaged subs.  For most alt managers, 20% of the return is low.


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Even if you spin off the subs , the discount will persist, because they are limited partners and dont control their destiny (the GP  BAM does). To eliminate the discount you would also have to eliminate the cash stream to the GP. In this case, the GP would ask for compensation in more LP units, just like IDR were eliminated in certain midstream LPs (MPLX, PSPX). The GP/LP structure is worse for the  LP from a governance structure compare to a c-Corp or self managed REIT and deserves to trade at a discount.

The discount I was referring to was the discount between the publicly traded LP price and what the market is attributing to the investment in the subs.  If BAM spun off its subs, the spun off subs what sell for what the publicly traded LPs sell for & thus reduce the discount associated with not being able to sell any of the subs when you want to.

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John Hjorth

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Re: BAM - Brookfield Asset Management
« Reply #1078 on: August 25, 2019, 11:54:19 AM »
One other thought that popped up last night, many of the alternative asset managers are undervalued right now (kkr being one) and I dont believe they have a similar to Bam NAV component.  And many of the executives of these undervalued entities have blamed the undervaluation on the carried interest stream.  Not saying they are right necessarily, but it seems like a possible alternative reason that can be applied to Bam? Just thinking.

vince,

Are your thoughts here about accumulated unrealized carried interest? [According to the BAM 2019Q2 Supplemental Information p. 4 disclosed at USD 2.537 B.]
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cmlber

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Re: BAM - Brookfield Asset Management
« Reply #1079 on: August 25, 2019, 12:02:34 PM »
I like BIP best as this where BAM has the largest competitive advantage vs. others.  These advantages include having assets that can be accretive to potential purchases and relationships in EM they have developed. 

Packer, curious how you think about the future returns of BIP.  Paying a ~4.5% distribution, and if they grow FFO 6-9% (management target), that's 4.5-6.75% net to the unit holder since BAM takes 25% of the growth in distributions, so 9-11% total returns.  Seems pretty good but nothing exceptional.  If they hit their 5yr plan targets, even without the holding company discounts narrowing, you do better than BIP.