No. of Recommendations: 7
Management says potential for 25% annual returns with BN.Management says Plan Value is $74 per share. Plan Value according to them is the sum of Blended Invested Capital (as opposed to IFRS Invested Capital) and their assessment of the value of Carried Interest. They break it down as shown below.
1. Blended Invested Capital 89 billion
2. Target carried interest, net 25 billion
3. Accumulated unrealized carried interest, net 6 billion
Total 120 billion or 74 per share
1 is a combination of IFRS for unlisted entities and market cap based on actual quotes for listed entites.
2 is (Carry we expect to earn assuming the fund achieves the target return, annualized on a straight-line basis) * (industry multiple of 10 to reflect franchise value)
3 Accumulated carry generated based on fund performance to date, assuming funds are liquidated at current values
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It goes without saying that Mr. Market doesn't see it this way. Otherwise the price (as of 9/24/23) wouldn't be at a 56% discount to their Plan Value.
Since we can realize returns only in the actual market and not in a slide deck or spreadsheet, it may be better to value BN using Distributable Earnings which seems to be the metric that Mr. Market is using.
I view Distributable Earnings as just a fancy name for Free Cash Flow. Using DE before realizations, current earnings yield is 7.36%. Including realizations which are lumpy but real, bumps earnings yield up to 8.81%. Viewed from this lens, BN is a good value but not absurdly cheap given the current macro economic environment. When trying to understand the market price, I find this perspective more reasonable, than going down the rabbit hole of management untrustworthy, financial statements three-card monte, accounting fraud, Enron, etc. which came up in previous threads, but with no specific evidence.
It's not for nothing that BN hit a all time high in 2021. DE in 2021 was 6,282 million, but plunged 17% to 5,229 in 2022 which explains the 35% price plunge from split adjusted 47.95 at 2021 yearend to post split 31.26 at 2022 yearend.
Assuming no multiple expansion, our total return from this point onwards can be expected to track DE and should result in a high single digit pleasant return as a baseline case. Any DE growth more than that or multiple expansion, if it occurs, is just gravy on top.
