(BN-N) US$33.64
75% Ownership of BAM and Substantial Upside Optionality Event
We are initiating coverage of BN, which owns 75% of BAM (Brookfield Asset Management Inc.)
Substantial Free-Cash-Flow: BN's current run-rate of distributable earnings (DE) pro-forma the spin-off is $3.7bln (2022E), which is projected to reach $9.3bln in 2027 (~20% CAGR). Carried interest has reached a key inflection point, whereby at least one fund from each flagship series is now generating realized carried interest, and gross realized carried interest is expected to total ~$14bln over the next five years and ~$46bln over the next 10 years. The dividend consumes minimal free-cash-flow (~$450mm) and the other potential uses are highly discretionary: sponsoring continuity vehicles, participating in coinvestments, assisting BAM in completing large transactions, etc.
Inorganic Growth Optionality: Brookfield has deployed ~$4bln of equity to insurance to-date, which generates ~$550mm of annualized DE, and is expected to produce ~15-20% returns over time, as the float is redeployed from cash/ financial assets to higher-yielding strategies. The American National deal resulted in a step-function increase in BN's insurance AUM, and we anticipate that the company may continue to use M&A to accelerate its growth in insurance. Brookfield also often sees other interesting investment opportunities that are too big for its private funds, which it was reluctant to execute on previously, for fear of confusing investors, but would feel comfortable executing on through BN. Brookfield sees potential upside to $12.6bln of DE in 2027 (~28% CAGR), based on inorganic growth in insurance and other opportunistic investments.
Strong Management Alignment: Brookfield's senior executives will remain heavily invested in BN, and therefore highly aligned with shareholders, such that we expect BN to repurchase shares if they trade at a discount to intrinsic value, up to and including the potential for a significant issuer bid over time.
TD Investment Conclusion
We believe that BN offers substantial upside potential. After subtracting the market value of the company's ownership stakes in BAM, BEP, BIP, and BBU, the current share-price assigns negative value to: 1) carried interest; 2) the real-estate portfolio, which includes a number of marquee assets; 3) the insurance business; and/or 4) the potential for accretive capital allocation.