No. of Recommendations: 10
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.
