Brookfield Asset Management Voting Ord Shs Class A T.BN.PF.J

BAM + BN (TD)

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Both companies are on their Action Buy List with targets of US$47.00 (BAM) and US$63.00 (BN). GLTA 

Brookfield Asset Managment Inc.

(BAM-N, BAM.A-T) US$32.40

Pure-play Alternative Asset Manager; ~90% Payout Ratio, No Debt Event

We are initiating coverage of BAM, which is 75%-owned by BN (Brookfield Corporation).

• Leading Global Franchise: BAM is a leading global alternative asset manager that is well-positioned in higher-demand areas: real assets (which offer significant inflation protection), transition investing, and private credit. The company is dominant in infrastructure and renewables, a global leader in real estate, and a first-mover in transition investing. We see the build-out of infrastructure (digitalization/decarbonization/deglobalization) and the transition to a sustainable energy future as meaningful tailwinds for BAM.

• Strong Growth Potential: BAM has more than tripled its fee-bearing capital over the past five years and expects to increase it to ~$1tln by 2027 (~20% CAGR), which we believe is achievable based on the opportunity to: 1) deepen existing relationships; 2) originate new relationships; 3) expand distribution channels; and 4) develop complementary investment strategies.

• Reasonable Valuation: Our target price is based on 25x 2024E fee-related earnings (FRE), a multiple that we believe is appropriate, given that ~85% of the company's FBC is either very long-duration and/or perpetual, and that BAM earns fees predominantly based on committed capital, and to a lesser extent, deployed capital, which provides high visibility to 2023E-2024E FRE. The stock is trading at ~20.6x 2023E and ~16.7x 2024E FRE, multiples that we see as very reasonable for a unique franchise that is growing at ~20%. Every 1x multiple-point on FRE equals ~$1.50-$2.00/share.

  TD Investment Conclusion

  We believe that BAM offers attractive organic growth potential, but assuming that the stock attracts a higher FRE multiple, as we expect, the company will have the option to use its stock as an M&A currency to scale up in target areas, such as Asia/technology, as it did with Oaktree in 2019. The Oaktree deal provided critical mass in credit, and added an inherently countercyclical exposure to BAM's franchise. Oaktree was also critical to building what is now a rapidly growing insurance business at BN, which has $45bln of AUM, with the potential to reach $225bln over the next five years, which will add to FBC/FRE at BAM, as BN is expected to invest a meaningful proportion of its insurance float in BAM-managed investment strategies.
  
  Brookfield Corp.

  (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.