No. of Recommendations: 9
From the price action the last few days it appears that investors prefer holding BAM (up 3.5% today) to BN (down 1.2% today). Would you agree, and if so, why do you think that's the case?
Beware recency bias. BAM was down the first few days post-spin, recovered the last couple. BN has done the opposite. Overall, a wash. BAM is down about 9% from its $32.40 close on Dec. 12, the first trading day post-spin. BN is down about 8% from its $33.64 close the same day.
However it looks to me like BAM is overvalued and BN is undervalued . . .
I would not say BAM is overvalued here, but I would definitely say BN is undervalued, and by quite a lot.
Annualized fee-related earnings were just over $2b at the end of Q3. Give $500m of it to the new BAM for its 25% stake and you get a market FRE multiple of 23x at today's close. Brookfield has estimated a range of 25x-35x for the pure-play fee business, based apparently on historical BX multiples. That's not giving BAM credit for any future carry, which will come into the picture at some point but not for a while.*
On the other hand, BN, the parent, is currently trading at less than 1x invested capital. You might think that's deserved given the large discount to book the public markets gave the real estate portfolio, now the privately held BPG. So let's slice, say, $15b off of invested capital, taking it from $53b to $38b, which is basically cutting the value of the real estate portfolio in half. Annualized carry at a 10x multiple is $27b. Let's slice that multiple to 6.7x to account for the future division, yielding $18b. BN's 75% stake in FRE is $1.5b times whatever multiple you choose to give it. Let's use the multiple of 23x reflected by BAM's current price. That yields a BN valuation of $38b ($53b invested capital minus $15b discount for BPG) plus $18b for carry plus $34.5b for FRE. That comes to $90.5b, which would make the current market cap of $51b a 44% discount to fair value. Reduce the FRE multiple to 15x (which I would call an overly conservative multiple intended to build in a margin of safety), and the SOTP comes down to $78.5b, which still leaves the current quote at a 35% discount to conservatively estimated fair value. (Please feel free to check my 'rithmetic.)
Looks to me like BN is severely undervalued, having been taken down since the spin way more than a 25% divestiture of the fee business would warrant. This is not counting unrealized carry at all.
*From the management circular re: the spin: The Corporation is entitled to receive 33.3% of the carried interest and similar distributions on new sponsored funds and
open-end funds of our asset management business and will retain 100% of the carried interest earned on mature funds.
