No. of Recommendations: 26
Valuing Brookfield has always been insanely difficult, in part because it required assigning arbitrary multiples to various parts of the business not traded in the public markets. That changed when they spun out a small stake in their biggest business, asset management, to derive a pure-play market multiple.
Whether we can now calculate true intrinsic value is debatable as ever, but we should be able to derive an expected market value, or fair value, for the parent company's shares that is consistent with the market values of the component parts. The market values of the subs conveniently make all the sector and business adjustments Brookfield's broad range of businesses and assets require. They will rise and fall with macro conditions and sentiment, but it should be possible to derive a fair value for the parent based on market values of the subs at any given time.
Prior to the BAM spinout late last year, one of the two big debates around Brookfield valuation was the multiple assigned to fee-related earnings (FRE), the custodial and management fees it earns in the business of managing other people's money, a business that has mushroomed into a behemoth over the past generation. If you used Blackstone's market FRE multiple, you got a much higher value than if you used those of the smaller publicly-traded managers.
Not surprisingly, Brookfield aspired to Blackstone's FRE multiple, which approached 40x in the heady days of 2021. In the plan value calculation Brookfield published with its quarterly results for a time, it included a 20x FRE multiple until acquiring Oaktree in 2019. After that, it pushed the multiple to 25x. Value investors unfamiliar with the alternative asset management universe generally thought these multiples were too high, often substituting a historical market multiple like 15x.
When Brookfield spun out 25% of the asset management business late last year, one purpose was to end that debate. Virtually all of the new BAM's earnings are FRE. In Q1, it reported $0.34 of distributable earnings and $0.33 of FRE. For the previous 12 months, it reported $1.33 of DE and $1.32 of FRE.
At BAM's closing share price on March 31 ($32.72), that's a FRE multiple of 24.8x. Adjusting for the dividend, it was 24.2x. At Friday's close of $31.55, it was 23.9x. These are all in a macro environment where alternative asset managers are generally trading toward the lower end of their 52-week ranges. This FRE multiple might be expected to rise in more exuberant market conditions. Whatever it's worth in judging Brookfield's credibility on other matters, its assignment of FRE multiples pre-spinout was not extravagant.
The other big debate around Brookfield valuation in the days of the published plan value was the treatment of carried interest. For the same ill-advised reasons that 25x FRE seemed high, 10x target carry seemed low and reasonable. But as older private funds met performance targets and newer vintages grew in size, target carry expanded rapidly. 10x has become a very large number and a much more significant part of the parent's valuation.
For Q2 2021, the last report in which they published the plan value calculation, 'target carried interest, net' was $1.75 billion, which became $17.5 billion of plan value at 10x. They also added 1x 'accumulated unrealized carried interest,' which they defined as carry already earned in funds that have not been liquidated. This amounted to another $3.5 billion in Q2 2021. So prospective carry accounted for $21 billion of plan value in the final published calculation, or not quite 20% of total plan value of $106.8 billion.
Fast forward to today, seven quarters later. Annualized target carry was $3.7 billion in the Q1 report. Net unrealized carry was $5.7 billion. Using the old formula, these figures would produce $42.7 billion of plan value, or more than 35% of what they now call net blended capital of $119.7 billion. This is comparable to the old plan value because they now include everything in 'Capital.'
They seem to have reduced the multiple they apply to target carry by one-third, to 6.7x. At least, that's what I get when I divide the total value they give it ($24.95 billion) by the annualized figure they report in a different section. They continue to value unrealized carry at 1x.
They have added a line called 'Direct Investments,' which I assume corresponds to the line 'Unlisted Investments' in the old plan value, referring to investments by the parent in assets or private funds not under the umbrella of any of the publicly-listed subs. That figure was $12.4 billion in the last plan value calc and remains $12.4 billion in the most recent report.
In the current Capital calculation, there is a vast difference between book, listed as 'IFRS,' and 'blended.' BN is worth $24.65 per share by IFRS, $73.83 by Brookfield's blended method.
About half of this difference is due to the disparity between IFRS and public market values of assets in the listed subs. The biggest discrepancy, by far, is in the asset management franchise. Being 'asset-light' is not an asset when the calculation is net asset value. The IFRS value of BN's 75% stake in BAM is $6.8 billion. Based on the market value of the listed 25%, BN's stake is worth $40 billion. Public market values of BEP, BIP and BBU are $10 billion more than the IFRS values of their assets.
The other half of the difference between IFRS and 'blended' values is $30.7 billion Brookfield adds for target and unrealized carried interest. These have no IFRS value.
To derive my own conservative BN valuation, I split this difference. I go with the market values of the subs, including BAM, because it makes no sense to me to value the same assets differently depending on which ticker you're discussing. BN's shares of BAM, BEP, BIP and BBU should be valued the same as the shares within those subs.
On the other hand, I am inclined to give no present value to uncollected carried interest. If and when it is collected and becomes earnings, it will be credited and presumably provide upside surprises that might contribute to stock performance. Given the importance of performance fees to the asset management model, I realize this might be overly conservative. But I wonder what would happen to all this anticipated carry in the event of a major market crash and deep recession. I prefer not to count on a bird in the bush and think of it as a bonus of the business model if and when it is collected.
Another big issue is assessing the value of Brookfield's extensive real estate portfolio. In the wake of the pandemic and subsequent interest rate hikes, many observers believed the IFRS value of this portfolio had not caught up to current market conditions. They were right. The IFRS value of Brookfield's real estate holdings took a 27% haircut in three months, from $31.8 billion at Dec. 31 to $23.1 billion at March 31. To be conservative, I add a 20% cut on top of that and assign an admittedly arbitrary value of $18.5 billion.
The final issue is a $4 billion disparity between IFRS and 'blended' values for the growing insurance business. Although it has its own ticker (BNRE) it is currently paired with BN, meaning it can be exchanged for BN, meaning its market quote is not yet determined by the financials of the business. Brookfield's only explanation for the difference is a footnote: 'Blended value represents management's view of the fair value of our insurance solutions business.' Given the absence of substance in that explanation, I go with IFRS for insurance.
So, here's a swing at a conservative valuation of BN that credits market values for the subs, but pares back Brookfield's generous assessments everywhere else (figures in millions except per share):
Units/Shares Public Market Value (at March 31)
BAM 1,226 40,131
BEP 312 9,986
BIP 209 7,230
BBU 142 2,702
IFRS value (at March 31)
Insurance 4,006
BPG 18,519*
Direct Investments 12,488
Other 942
Total Investments 96,004
Corporate and other (349)
Capital 95,655
Debt and Preferred Capital (16,700)
Net Capital 78,955
Per share $48.70
*IFRS value minus 20%
As it happens, this method yields a value almost exactly halfway between IFRS and Brookfield's blended value. Dissent welcome.
