Premier asset manager well positioned for continued strong growth
Investment recommendation
Brookfield Asset Management (BAM) is a global alternative asset manager with a focus on property, renewable energy, infrastructure, and private equity. In addition, BAM meaningfully expanded its credit platform through the acquisition of Oaktree in 2019. More recently, Brookfield has added new areas of focus including insurance, growth investing (technology), transition funds and secondaries. Raising larger funds has led to substantial growth in management fees, carried interest, and cash flow. Along with the new areas of focus, we expect continued growth in both assets under management and cash flow.
Recent fundraising should drive continued management fee growth. Brookfield continues to raise larger flagship funds, and the current round of fundraising should exceed $100 billion, up from $57 billion in the prior round. In total, fee-bearing capital has risen from $108 billion in 2016 to $325 billion currently, and is poised to rise materially over the next few years. We note that 77% of this capital is in long-term or perpetual strategies.
Investment highlights
New products provide additional growth opportunities. Along with growing its flagship business lines, credit and insurance are, in our view, the two areas which provide the greatest opportunity for growth. Management believes that the ‘insurance’ business could exceed $200 billion within five years, up from $50 billion currently. BAM’s growth investing platform, which is largely focused on technology investments, is projected to exceed $100 billion, while transition funds that focus on the transition to a net-zero carbon economy could also exceed $200 billion.
Growing management fees drive cash flow growth. Growth in fee-bearing capital has led to a dramatic increase in management fees, particularly when including carried interest. Fee-related earnings are now $1.8 billion annually ($1.09 per share), up 19% from $1.4 billion a year ago, while net carried interest is now $2.0 billion ($1.21 per share) annually. Carry eligible capital is now above $159 billion, and gross accumulated carried interest is now approaching $6 billion ($3.64 per share). We expect this number to continue to rise as the large amount of recently raised capital is invested.
Of note, Insurance Solutions is an exciting avenue for growth, as in a low-interest-rate environment, the ability to match real estate and infrastructure assets against liabilities provides the opportunity for highly accretive returns as the insurance business grows. Management believes that the insurance business could generate almost $500 million ($0.30 per share) in fees annually by 2026.
Valuation
Year to date, BAM’s shares have returned 49.1%, including dividends. The shares currently trade at a 1% premium to our current estimate of BAM’s NAV (US$57.48), and a 14-41% discount to the most recently disclosed ‘Plan Value’ of US$67-83, provided at the most recent investor day in September. Our target price of US$69.00 equates to a 20% premium to our NAV estimate, and is at the low end of management's estimate of fair value. We note that based on the current business plan presented at the investor day, ‘Plan Value’ would rise to in excess of US$150 per share by 2026