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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? My guess is that investors believe that BAM will grow faster than BN, which makes sense. However it looks to me like BAM is overvalued and BN is undervalued, although I'm not sure that you would agree with that assessment. Certainly BN is the boss: they set the company strategy, choose the the properties to own and set the fees charged to co-investors. If I were buying one or the other, BN or BAM, I think I would choose BN. In fact, I bought a tiny amount of BN yesterday. Thoughts?

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.

So let's slice, say, $15b off of invested capital, taking it from $53b to $38b,

Above is incorrect. You are looking at Total Invested Capital (TIC), but should be looking at Net Invested Capital (NIC).

NIC = TIC - Corporate Borrowings (11.3b) + Net Working Capital (496m) - Preferred Shares (4.375b).

NIC was 37,727 at the end of 3Q, approximately 15 billion less than the 53 billion you used.

and the SOTP comes down to $78.5b, which still leaves the current quote at a 35% discount to conservatively estimated fair value

Adjusting for discrepancy, and leaving everything else the same, the SOTP comes down to 63.5 billion which is a 19% discount to the 50.5 billion market cap at today's close.

I agree with your conclusion that BAM is not overvalued and BN is undervalued, although not as severely.

Buying BAM at 25.60 (5% yield) and below should work out well if the expected 15% annual growth in FRE materializes.

BN is fine as well. Why choose when you can own both! Just decide how much (as a percent of your net worth) you want to allocate to Brookfield, and within that how to split between BN, BAM and the other listed entities if interested.

You are looking at Total Invested Capital (TIC), but should be looking at Net Invested Capital (NIC).

Actually, I'm looking at Net Invested Capital on Page 7 of the Q3 Supplemental Information. It looks like you might be using IFRS (book) value for the listed subs as opposed to their market values, which slices $17.4b off of Net Invested Capital (including 'blended' values for insurance and other investments). From Page 7: NIC at Q3 using IFRS inputs was $35.7b. Using Brookfield's 'blended' inputs, it was $53.1b. Both figures include the addition of $496m in working capital and the subtraction of $15.7b in debt and preferred securities.

Using IFRS inputs is a perfectly reasonable way to go, but I wouldn't slice the arbitrary $15b off of BPG on top of that. If book is appropriate for BIP and BEP, cutting their market values roughly in half, then it's appropriate for BPG as well. If market values are appropriate for the listed subs, then it's consistent to revert to the market value for BPG when it was BPY. Personally, I find it weird to value BIP and BEP at less than half what you can buy and sell the listed subs for, so I use the market values for them and then make the arbitrary cut to BPG. Either way, the reduction is similar, $17b v. $15b. I just wouldn't do them both. But to each his/her own.

There are lots of subjective judgments like that trying to value this complicated conglomerate. You can count accumulated unrealized carry, as Brookfield does. You can eliminate even realized carry entirely on the theory that it waxes and wanes over economic cycles and should be regarded as gravy when calculating a margin of safety. You can distinguish between the 'blended' values for BEP, BIP and BBU, which are marked to market, and those for insurance and other investments, the sources for which are less clear. And, of course, any multiples for carry and FRE are dealer's choice.

Here are a few valuation exercises using different choices:

1. NIC (IFRS): $35.7b
Carry (8x): $21.3b
FRE (15x) : $30b
Total: $87b
Per share: $53
Current discount (at $31.30): 41%

2. NIC (Brookfield blend): $53b
Carry (8x): $21.3b
FRE (20x) $40b
Total $114b
Per share: $69.70
Current discount: 55%

3. NIC (Brookfield blend): $53b
BPG discount -$15b
Carry (8x) $21.3b
FRE (15x) $30b
Total: $89.3b
Per share: $54.45
Current discount: 42%

4. NIC (personal blend): $46.25*
Carry (8x): $21.3b
FRE (20x): $40b
Total: $107.6
Per share: $65.58
Current discount: 52%

5. NIC (IFRS): $35.7b
No carry
FRE (15x): $30b
Total: $65.7b
Per share: $40.06
Current discount: 22%

6. NIC (IFRS): 35.7b
BPG discount: -15b
No carry
FRE (15x): $30b
Total: 50.7b
Per share: $30.91
Current discount: None

7. NIC (personal blend): $46.25
BPG discount: -$15b
No carry
FRE (20x): $40b
Total: $71.25b
Per share: $43.45
Current discount: 28%

There are an almost infinite number of permutations depending on the various subjective judgments available. Prospective investors should feel free to mix and match these ingredients to their own taste. I should note that all of the examples above use FRE multiples lower than those projected by Brookfield and lower than the current FRE multiple implied by BAM, the pure-play fee business (22.9x as I type). A couple of other notes:

*In this personal blend of Net Invested Capital, I use market values for the listed subs -- BEP, BIP and BBU -- but IFRS values for insurance and other investments because I don't know how Brookfield derives its 'blended' values for those verticals.

I'm using 8x rather than Brookfield's 10x for realized carry because the parent will derive 83.25% of new carry.

It looks like you might be using IFRS (book) value for the listed subs as opposed to their market values

Yes, I was looking at IFRS, not blended. Thanks for the clarification and everything else in your post. This board is lucky to have you and all of us are lucky to have Manlobbi! Couldn't have asked for a better Christmas gift!

Carry (8x): $21.3b
I'm using 8x rather than Brookfield's 10x for realized carry

Can you please clarify why you are calling above realized carry. I am assuming you are referring to 'annualized target carried interest, net' which was 2,657 at 3q end. Times 8 is 21.3 billion. SI Asset Management, page 6.

But this is not realized yet. The performance is not yet in the bag. It's carried interest Brookfield would earn if targeted returns were achieved over the life of the various funds.

You can count accumulated unrealized carry, as Brookfield does.

Yes, I also noticed that they do this in their plan value calculations with a multiple of 1. Accumulated unrealized carried interest, net was 5,483 at 3q end. So it adds about 5.5 billion to the market cap.

all of us are lucky to have Manlobbi! Couldn't have asked for a better Christmas gift!

Couldn't agree more. I would add that you have already made some valuable contributions in the very early days of this board and I hope you will continue to contribute. You have a gift for concision that I, alas, lack. Brookfield's combination of complexity and historical returns makes it endlessly fascinating and I hope we get enough participation here to make this board a little livelier than its TMF predecessor.

Can you please clarify why you are calling above realized carry. I am assuming you are referring to 'annualized target carried interest, net' which was 2,657 at 3q end. Times 8 is 21.3 billion. SI Asset Management, page 6.

Yes, you are quite right that I should have called it target carry, not realized. I think I do this subconsciously in order to distinguish it in my mind from accumulated unrealized carry, which Brookfield breaks out separately and adds to a plan value calculation that already includes 10x target carry. If target carry is not yet realized, then what distinguishes it from accumulated unrealized carry, and why is it not double-counting to add one to the other?

The language in the glossary of terms might hold the answer, but even if you accept that 'unrealized carried interest' represents only the change in that metric since the last report, that doesn't explain how 'accumulated unrealized carried interest,' the metric they use in the plan value calc, would not be at least a subset of target carry. I can't tell if I'm too dense to get this or if the language is actually as unhelpful as I find it. From page 40:

Carried interest is a contractual arrangement whereby we receive a fixed percentage of investment gains generated
within a private fund provided that the investors receive a pre-determined minimum return. Carried interest is typically
paid towards the end of the life of a fund after the capital has been returned to investors and may be subject to
'clawback' until all investments have been monetized and minimum investment returns are sufficiently assured. This is
referred to as realized carried interest. We defer recognition of carried interest in our financial statements until they are
no longer subject to adjustment based on future events. Unlike fees and incentive distributions, we only include carried
interest earned in respect of third-party capital when determining our segment results.

' Unrealized carried interest is the change in accumulated unrealized carried interest from prior period and
represents the amount of carried interest generated during the period. We use this measure to provide insight into
the value our investments have created in the period.

' Accumulated unrealized carried interest is based on carried interest that would be receivable under the
contractual formula at the period end date as if a fund was liquidated and all investments had been monetized at
the values recorded on that date. Unrealized carry refers to the change in unrealized carry during a specified period,
adjusted for realized carry.

' Accumulated unrealized carried interest, net is after direct costs, which include employee expenses and taxes.

' Annualized target carried interest represents the annualized carried interest we would earn on third-party private
fund capital subject to carried interest based on the assumption that we achieve the targeted returns on the
private funds. It is determined by multiplying the target gross return of a fund by the percentage carried interest and
by the amount of third-party capital, and discounted by a utilization factor representing the average invested capital
over the fund life.

I resolve my confusion by punting. I do not include accumulated unrealized carry in any of my valuation exercises, and I eliminate all carry when determining a margin of safety.

If target carry is not yet realized, then what distinguishes it from accumulated unrealized carry, and why is it not double-counting to add one to the other?

Here is my understanding.

Target Carried Interest refers to performance that is not yet in the bag. It's not a done deal yet. It's carried interest we would earn IF we achieve targeted returns over the life of the fund. Assuming Brookfield consistently achieves performance targets, it's a consistent stream of earnings and it's appropriate to slap a 8-10 multiple. Fee related earnings are of course much more reliable and get a 20+ multiple.

Unrealized Carried Interest refers to performance that is already in the bag, but not yet realized. Maybe because the fund is still active and not wound up yet? Because claw back period is still ongoing? Not sure. In any case, it's money Brookfield would get if the fund were theoretically wound up at the end of the reporting period (not end of life of the fund). That's why in the plan value calculation they use a 1 multiple because it's just money already earned.

So is it double-counting? I don't think so. At a given moment in time, unrealized carried interest is money you have already earned, whereas target carried interest is money you expect to earn based on future good performance. One way to think about it is that the 8-10 times target carried interest is the price you are paying for the carried interest income stream and the unrealized carried interest is the dividend/payout you are getting every quarter/year.

I am happy to be corrected if above isn't right.

Given 75% the manager is a owned within BN and BN owns parts of those entities that pay out carry...

What specific parts or subs of the Brookfield entities - and what selection of the owners of the subs etc., pay the carry to the manager? Asking along with this of course: is Brookfield essentially paying some percentage of the carry to itself?

All separate from who keeps the carry as that is clearly specified.

So is it double-counting? I don't think so. At a given moment in time, unrealized carried interest is money you have already earned, whereas target carried interest is money you expect to earn based on future good performance.

The key phrase here is 'At a given moment in time.' This would be the legal standard and I'm sure you're right, they're too smart to violate that, at least in any way obvious enough for you or me to see it.

But our purpose is not forensic accounting. Our purpose is valuation. And we are using all these categories of carried interest because Brookfield management told us to, in a plan value formula it abruptly stopped publishing in the middle of last year. They never said why, but one obvious explanation -- assuming it did not, in fact, come too close to some legal or ethical line -- was that it produced values far higher than the most exuberant market quote. In short, no one believed it.

For a long time, I thought the culprit was the multiple they assigned to fee-related earnings. Particularly for a company with a value sensibility, assigning multiples in the 20s seemed . . . optimistic.

However, based on FRE multiples assigned elsewhere by Mr. Market, including the nascent multiple for the new BAM, something in the area of 20x-25x does not seem out of line. The aspirational 25x-35x of Investor Day may have been a bit backward-looking as the era of free money came to an end, but the multiples offered in the plan value calculation never exceeded 25.

So where was the disconnect? Increasingly, it seems to me it was in these carry categories, where $1 of conceptualized carry translated into $10, then $11, and finally $12 of company valuation.

Imagine I'm $1 of target carry, merely a gleam in my portfolio manager's eye at the beginning, like the imaginary child in the hopeful parent's imagination. Brookfield is so confident in my ultimate existence that it urges investors to value me at $10 in advance (the 10x target carry in the plan value formula). This confidence is based on a period of remarkable growth in assets under management and predictable achievement of performance targets. This growth and performance, in turn, is based on an extended period of exceptionally low interest rates that has devalued traditional fixed income instruments and driven vast amounts of wealth into alternative assets, where asset-level leverage and contracted user payments have made the satisfaction of performance targets so routine as to seem inevitable.

After a long period of gestation as $1 of target carry, I finally graduate (and am reported) as $1 of unrealized carry (the 1x unrealized carry in the plan value formula). Having taken $10 of valuation credit for me over a period of years, my parent now wants an additional face value credit of $1 for me now that I'm in the bag, though still not realized. Are those $10 of target carry subtracted when I cross the Rubicon? Not so you would notice. Target carry continues to grow, inexorably, because the growth in AUM we have seen will inevitably continue, as will the easy achievement of performance targets, indefinitely into the future.

Finally, years after I was worth $10 to the company's valuation, and some more time after I was worth an additional $1 as in the bag, I am finally realized and reported as $1 of income, which is to be valued at some multiple of earnings not specified in the formula.

Alas, I would say that none of this was inevitable and it's less inevitable now, as interest rates rise. One day, the rapid growth in AUM and easy achievement of performance targets will come to an end. Nothing grows to the sky and no financial trends last forever. Is it prudent to value Brookfield on the basis of a formula that requires it to continue as far as the eye can see? Mr. Market's current treatment of alternative asset managers generally suggests he has more immediate doubts.

I am a longtime Brookfield shareholder and a believer in its management team. Like Markel's Tom Gayner, I like that they come to work every day thinking about the whole world. Combined with their value sensibility, this global reach allows them to find value when entire national markets, to which many companies are limited, are overvalued.

Nevertheless, I think their Achilles' heel is a relentlessly self-promotional messaging culture that robs them of credibility in the markets. Can Brookfield be trusted to start lowering target carry levels in time to alert investors to their vulnerabilities? I would not bet on it.

I am glad that they stopped publishing their aspirational plan value multiples and I think we, as investors, should take the hint and stop using them. For myself, I am eliminating carried interest from my valuation exercises. When it shows up as income, Brookfield will get credit for it. That makes a conservative valuation of the parent, Brookfield Corp., a relatively simple exercise:

Determine net invested capital using IFRS values for private holdings and market values for listed subs, make any idiosyncratic adjustments you feel appropriate (as for BPG), then use the market multiple assigned the new BAM for FRE. Let carry be the gravy that allows Brookfield to underpromise and overdeliver, once the mantra of value managers.

Alternatively, reduce their previously recommended target carry multiple substantially to reflect that it represents current conditions and should not be extrapolated too far into the future.

Nevertheless, I think their Achilles' heel is a relentlessly self-promotional messaging culture that robs them of credibility in the markets. Can Brookfield be trusted to start lowering target carry levels in time to alert investors to their vulnerabilities? I would not bet on it.

I agree. In the 2022, and if I remember correctly, in the 2021 investor day presentations, they did bring projections from 2017 and 2016 respectively. Of course the actuals compared favorably to the estimates. I hope they continue to hold themselves accountable in this way in future investor day presentations.

Determine net invested capital using IFRS values for private holdings and market values for listed subs, make any idiosyncratic adjustments you feel appropriate (as for BPG), then use the market multiple assigned the new BAM for FRE. Let carry be the gravy that allows Brookfield to under promise and overdeliver, once the mantra of value managers.

Okay. Taking Blended Invested Capital and giving the BPG (IFRS) a 50% haircut gives 37,562 million. 75% of BAM at 29 per share is 35,494 million. Adding the two, per above valuation method, gives a fair market cap of 73,056 million for BN which equates to 44.67 per share.

Current BN price of 31.50 is a 29.49% discount to even the most conservative valuation method. Comparing to Plan Value results in an even more absurd gap. How can this be? What are we missing?

In any case, it's best not to make big moves. Nobody knows what the future holds, but more likely than not, the market won't soar next year. Caution has replaced FOMO in the market. So, whether buying or selling, DCA over time seems to be reasonable strategy and should work out okay. Not just financially, but also result in less mental stress.

Current BN price of 31.50 is a 29.49% discount to even the most conservative valuation method. Comparing to Plan Value results in an even more absurd gap. How can this be? What are we missing?

I'm not sure we're missing anything. Companies in this space are being hammered across the board. The conventional wisdom today, as expressed in the financial press, is that private equity has been slow to write down the value of its investments, even as public equity quotes have fallen quite dramatically. From The Economist earlier this month:

It is those high-fee private investments that deserve scrutiny. The performance of private assets has been much vaunted. By one estimate private-equity funds globally marked up the value of the firms they own by 3.2%, even as the s&p 500 shed 22.3%.

This is largely a mirage. Because the assets of private funds are not traded, managers have wide discretion over the value they place on them. They are notoriously slow in marking these down, perhaps because their fees are based on the value of the portfolio. However, the falling value of listed firms will eventually be felt even in privately owned businesses. In time, investors in private assets who thought they had avoided the crash in public markets will face losses, too.

https://www.economist.com/leaders/2022/12/08/inves... (subscription required)

I was recently reading the report of a state investment council that included a chart reflecting its rolling 10-year net internal rate of return from investments with a private equity manager. It grew from negative 0.5% in 2013 to positive 6.8% by 2019 in nearly a straight line upward. Since then, the line on the chart has rapidly descended the other side of the mountain, to a rolling 10-year IRR of 3.8% most recently.

It is worth noting that the terms 'private equity' and 'alternative assets' are used almost interchangeably in the financial press, which is like using 'butter' and 'dairy products' interchangeably. This helps to explain the disproportionate shellacking Brookfield is currently taking in the public markets. Traditional private equity deals are a small part of its business. Real estate, credit and infrastructure investments each play a larger role. In general, these are less volatile places to invest than the equity of public and private companies. It seems that Brookfield's range of dairy products is being treated as if it were all butter.

That just means we may be at the beginning of a propitious period to launch or add to a long-term investment for those with stomachs strong enough to do it.

Long-long-long time Brookfield bunch owner here, way back in Brascan time.

Investors come and go, euporia appears with detailed analysis then generally fades repeatedly as the stocks of the Brookfield entities never sustain with such valuations absolutes. Plan value is something to marvel over, not invest believing.

Still, if you buy at reasonable prices a resonable outcome arrives. There are an endless number of entities with stocks that now-and-forevermore sell at discounts to net assets. BN is just one of many.

Flatt is obsessed with growth and BAM.

Long Brookfield and won't sell. A Brascan stock certificate sits in my reading nook shelf. I look at it and the book just beside it called Acres of Diamonds. The diamonds are under your feet while you look elsewhere.

But, regardless of the hype and detailed stock analysis, beware of paying too much.

But, regardless of the hype and detailed stock analysis, beware of paying too much.


Almost all the recent posts here are about calculating a fair value for BN and BAM, and whether it is significantly higher than current market price.

So what is your assessment of fair value?

Is buying at today's price paying too much?

Brookfield reminds me of Loews Corp (symbol L), not to be confused with the hardware retailer Lowes. The CEO Jonathan Tisch constantly complained about market undervaluing his company. The company has severely lagged S&P 500 over the last 30 years.If you held it the whole time, you wouldn't even have doubled the money. (How come so many terrible companies end up with single alpha symbols: Ford, Loews, Sears?)

There were many discussions of the company and others like Luecadia and Fairfax Financial in the Berkshire, Falling Knives and other value investing boards in TMF. The lesson I learned is that if Mr. Market fails to recognize what you believe to be the fair value of a company after a number of years, Mr. Market is probably right and you are wrong. Better to sell and move on. I learnt my lesson after owning Luecadia for about a decade of zero return.

rnam...no assessment of fair value but here's a cut/paste as I added a tiny bit. Think I tried to add like 1500 but only this much went through at whatever limit order figure I'd put on it.

12/19/2022 Buy 361 BAMPopup BROOKFIELD ASST MGMT CL A LTD VTG SHS @ $27.5200 -$9,934.72

Again, as I've mentioned here before, if you feel you must buy BN or BAM just wait for fear times. Brookfield drops hard and fast in any economic uncertainty, it drops like a big heavy rock.

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