August 12, 2021
Brookfield Asset Management Inc. It’s All Coming Back to Me Now
Our view: The 3 key takeaways are: (1) with BPY Coming Back to BAM Now, BAM is starting its plan to grow and surface value within the portfolio; (2) the combination of a very favorable fundraising environment plus acquisitions that could significantly increase management fee revenues are positives for Fee Related Earnings (FRE) growth; and (3) despite hitting its US$1B realized carried interest target for 2021 already, BAM may only be ~50% done with its planned monetizations for this year, which could drive sustained elevated realized carried interest in the near term. While BAM’s share price has improved recently, the shares significantly underperformed U.S. peers this year and this could be a potential driver of further valuation upside in the near term by narrowing the valuation discount, particularly given BAM’s positive fundamentals. We increase our price target to US$65 (was US$59) and maintain our Outperform rating. BAM's Investor Day is Sept. 20/21.
Key points:
BPY privatization increases flexibility to grow and surface value. BAM has ~US$30B of equity in real estate and believes they can surface up to US $25B of cash over the next 5-7 years. Of the real estate portfolio, BAM may ultimately keep ~1/3 on balance sheet, ~1/3 monetized and ~1/3 may move into other BAM strategies (e.g., BAM’s new private non-traded REIT, Brookfield REIT, targeted for income-oriented private investors).
Favorable fund raising environment. BAM believes current low interest rates are likely to keep demand strong for alternatives/private equity. While BAM’s goal is to have US$25B+ sized funds for each of its 5 flagship funds, current fundraising updates include: (1) opportunistic credit fund fundraising is almost complete at US$15B with 62% invested or committed; (2) Global Transition Fund had a founders’ close, raising US$7B (fees to BAM aren’t recognized until the first close happens), with a US$12.5B hard cap; (3) BSREP4 (Real Estate) raised US$9B so far and BAM expects it to exceed BSREP3’s US$15B; (4) BCP5 (US$9B Private Equity fund) is >75% invested and BAM expects to fundraise for BCP6 in Q3/21; and (5) BGI4 (US$20B Infrastructure fund) is 70% invested or committed and BAM is likely to start fundraising in late 2021/early 2022.
Q2/21 Operating FFO (OFFO) of US$813MM (US$0.50/share, +23% Y/Y) was below our US$960MM (US$0.60/share) forecast, with the shortfall driven by lower-than-forecast OFFO from Invested Capital (primarily the Private Equity & Other segment), partly offset by higher-than-forecast FRE.
Q2/21 consolidated Fee Bearing Capital (FBC) (incl. Oaktree at 100%) was US$325B, +2% vs. US$319B Q/Q and +17% vs. US$277B Y/Y. The change Q/Q was broad-based while the change Y/Y was due to Perpetual Strategies and Oaktree.
Increasing price target to US$65/share (was US$59) and maintaining Outperform rating. Our increased price target primarily reflects a 5% premium to NAV (was 0%), as we believe positive fundamentals; a favorable fundraising environment; and elevated monetization activity is likely to see the shares trade at a slight premium to NAV.