No. of Recommendations: 8
Thought I'd fiddle with some comparative charts comprising the big public alt managers after watching Ares Management stock (ARES) run up recently. BN is the laggard over the past five years, by quite a bit:
http://tinyurl.com/5s3hse59Give this url a minute to populate. It should be a Yahoo Finance chart showing the stock price performance of the five biggest publicly-traded alternative asset managers -- Blackstone, KKR, Brookfield, Apollo and Ares -- over the past five years. If you fiddle with the time period options just above the chart, BN is also the laggard among this peer group over one- and two-year periods, as well as the "Max" setting, which should (but won't necessarily) go back to 2014, when ARES went public. You can insert any dates you choose into the date range field.
There are differences among these managers in emphasis, but they all offer a similar range of investment products encompassing private equity and private credit. BN is relatively asset-heavy in terms of investments it holds on its balance sheet. The spinout of BAM, its asset-light investment manager, established the asset-light market multiple it hoped for, but has not had a discernible impact on the performance of the parent, which still owns most of the manager.
Private credit, in the form of direct lending, has become quite a powerful force as the regional banking sector has retreated, which may help to explain the recent outperformance of Ares. This large-scale movement of corporate credit into the hands of private lenders unencumbered by banking regulations has not yet weathered a recessionary cycle.
Commercial real estate has been in a down cycle, exacerbated by the pandemic, which may account for at least some of BN's underperformance. Blackstone manages an even bigger commercial real estate portfolio, but it doesn't tend to hold those investments on its balance sheet.
Brookfield has easily the most complex structure of the group with its web of public and private funds and the sometimes difficult to decipher related-party transactions among them. I think it's fair to say this complexity and opacity provokes more public critiques than its peers generally get, but I have no idea if this affects Mr. Market's valuation. The analysts on their earnings calls adopt a generally deferential posture and seldom inquire into these matters.
I do wonder whether the proliferation of publicly-traded subsidiaries has affected the viability of the just-hold-the-parent strategy. While it is true that the parent continues to hold a stake, often a substantial one, in each sub, it's also true that its stake in each would be greater -- i.e., 100% -- without the spinouts.
The combined market cap of the other nine common equity tickers now exceeds the market cap of the parent (assuming Yahoo Finance has all these market caps right, which it may not). Here's what they show currently:
BN $61.5 billion
BEP $16.9 billion
BAM $15.8 billion
BIP $14.5 billion
BEPC $4.9 billion
BIPC $4.8 billion
BNRE $4.4 billion
BNRE-A $4.4 billion
BBUC $1.8 billion
BBU $1.7 billion
Total non-BN: $69.2 billion
I am most skeptical of the identical numbers for BNRE and the new BNRE-A, but even deleting BNRE-A altogether, the market caps of the subs exceed the market cap of the parent.
This suggests that if all Brookfield's activity took place under the aegis of a single stock ticker, as it did when I first invested in them many moons ago (it was just BAM back then), it would be comfortably ensconced in second place, behind Blackstone, with a market cap in excess of $120 billion. The whole complex is there today, but investors in the parent enjoy a market cap roughly half that, now well behind KKR, with Apollo nipping at its heels.
If a valid explanation for BN's relatively pedestrian performance of late is the dilution of its value creation among 10 tickers, one might expect it to be most pronounced following the earliest spinouts, BIP and BEP, which have grown over time into two of the three biggest subs. In fact, a big part of the divergence occurred in the last year, following the spinout of BAM, the other big sub. Here are the five stock performances over the past year:
KKR +58.4%
ARES +53.2%
APO +43.7%
BX +32.4%
BN +4.7%
This one-year divergence is particularly difficult to explain. The BAM spinout cost BN 25% of the asset manager, but also produced a repricing that should have elevated BN's 75% share. The market has been discounting the real estate portfolio since well before the last year, dating to the spinout and take-back of BPY. BAM did a bit better than BN over the past year, up 24%, but the starting price a year ago was still subject to the idiosyncratic after-effects of its spinout, so that's a bit of a noisy data point. The other big subs have done even worse than BN. BIP and BEP are both down marginally from a year ago.
BN has claimed wonderful results during this period, as it always does. Asset dispositions have been down, but the market is accustomed to their lumpiness, and BN has reported consistent distributable earnings before dispositions.
Perhaps Mr. Market thinks these competitors were more agile in pivoting to the lucrative direct lending game. Perhaps BN is perceived as late to the party on insurance (Apollo's $11 billion takeover of annuity provider Athene was announced nearly two years ago). Perhaps BN is paying a price for all the complexity and opacity. I'm just guessing here.
No doubt there are other important distinctions among these firms that help to explain the divergence in their market performance. Whatever the cause(s), the disparity seems quite durable at the moment.
