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

RBC

[retiredcf]

Brookfield Asset Management Ltd. 
Outperform

December 21, 2022

Allow myself to (re-)introduce...myself: Initiating at Outperform

NYSE: BAM; USD 29.36; TSX: BAM

Price Target USD 35.00 

Our view: Who doesn’t love a good Austin Powers reference? Back to business...we believe BAM can deliver a 16% CAGR in Fee Related Earnings (FRE) over the next 5 years and that its FRE valuation multiple could benefit as arguably the purest publicly-traded private equity/alternative asset manager in North America. Also positioned as a yield-oriented security (4.4% dividend yield) and with the shares trading at an implied 20x FRE multiple, we see the shares as attractively valued. We initiate coverage with an Outperform rating and US$35 target.

Key points:

Note: We published two detailed reports on the Brookfield asset manager spinoff: (1) a November 2, 2022 detailed Primer outlining details of the asset manager spinoff (“Primer for Asset Manager Spinoff: Breaking Up Isn’t Hard To Do”); and (2) a December 6, 2022 report with a detailed analysis on the valuation of BN and New BAM (“Wax on, wax off: Valuation analysis of the Asset Manager spinoff”).

Post-Asset Manager spinoff from Brookfield Corp. on December 9, 2022, we believe BAM offers investors exposure to arguably the purest private equity/alternative asset manager in North America, reflecting: (1) asset light, with zero principal investments; (2) debt-free and US$2.8B in cash; (3) initially no accrued but unrealized carried interest and with material realized carried interest unlikely until 2027, this makes BAM essentially a 100% fee revenue story in the near- to medium-term; and (4) an asset management business at scale with US$407B in Fee Bearing Capital (FBC). Consequently, we think BAM could trade in line with Blackstone (BAM’s closest peer in our view) vs. historically trading at a discount.

Initiating coverage at Outperform with a US$35 target. We separately value the FRE and carried interest. For FRE, we use 20x our 2024E FRE forecast, which is in line with BAM’s current multiple, a slight premium to its historical average and also vs. Blackstone, which we think is warranted given BAM’s competitive positioning; our growth forecasts; and given the current market environment. We value carried interest at 1x accumulated but unrealized carried interest, consistent with how we previously valued BAM’s carried interest.

Over the next year, we see valuation upside primarily driven by FRE growth + BAM’s dividend yield. We think BAM could trade at an implied FRE multiple of 18x-23x in the near term, implying a share price of ~US$26.25-US$33.50. Over 2-5 years, we see significant valuation upside driven by continued mid-teen CAGR in FRE; FRE valuation multiple expansion reflecting more positive market conditions; more material carried interest generation; and BAM’s dividend yield.