BN is a renowned alternative asset manager with a history dating back more than a century.
The company manages approximately $750 billion worth of assets across various sectors, including renewable energy and transition, infrastructure, private equity, real estate, and credit.
The Class A Limited Voting Shares of the Corporation ("Class A Shares") are listed on both the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE")
The current CEO of BN, Bruce Flatt, took charge in 2002 when sales were just 3 billion and would reach 78 billion by the end of 2021.
The stock has increased from $5.55 per share in 2003 to $30.87 per share in 2022, a CAGR of 10.38%.
Not a mini-Berkshire
Using the cash flow from operating activities and float from its insurance business, Berkshire Hathaway (“BRK.A, BRK.B”) is renowned for having one of the most extensive dollar-value securities holdings in its proprietary accounts. However, most people seldom consider the enormous magnitude of their railroad, utility, and energy infrastructure portfolio.
Their unaudited financial statements, as of September 30, 2022, showed a staggering $ 460 billion in cash, securities, and other investments. In other words, the portfolio of various operational firms, including their railroad, utility, and energy infrastructure portfolio, is just 32% of their fair value. According to the stock market, the investment portfolio makes up around 68% of the business's value. Most people understand this enormous sum tied to what is likely our generation's most significant capital allocator, and it has gained a devoted following.
Lest we forget, these infrastructure investments provide abundantly regulated, inflation-adjusting recurrent cash flows directly into Mr. Buffet's hands. In 2021 the Freight rail transportation business brought in 23 billion in sales, and the energy and services business 25 billion in sales generating approximately 10 to 11 billion in pre-tax earnings compared to 8 billion in 2020. The shareowners of Berkshire have benefited from this sustained cash flow stream. It shows the benefit of having a disciplined, astute capital allocator who appreciates the value of a top-notch company, securities, or tangible assets.
Even though BN may appear to be a smaller version of Berkshire Hathaway from the outside, a closer look at its organizational structure reveals that the cyclical turned alternative asset manager was a business operator first before transitioning to managing assets. BN invests its balance sheet with the capital it raises from third parties in the same deals, aligning the economic interest of the general partner and the limited partner. They are eating their metaphorical cooking.
Bruce Flatts Brookfield Asset Management
William Mackenzie and Frederick Stark Pearson founded the company in 1899 as the São Paulo Tramway, Light and Power Company. It was active in developing and administrating Brazil's transportation and electrical infrastructure. The business started to divest its Brazilian holdings in the 1970s and made significant investments in Canadian real estate, forestry, and mining. The company's current CEO, Bruce Flatt, who joined in his early 20s, saw the business go through reorganization and turnaround as it tried to get back on its feet. The company had $CAD 4.6 billion in revenue, $1.8 billion in operating profits, and $601 million in cash flow from operations when he took over as CEO in 2002. That is a cash conversion of 34% compared to their current average cash conversion of 60%, meaning that they bring in 60 cents of pure cash, not accounting gimmicks, for every dollar in accounting earnings. In 2005, after 37 years, Brascan Corp. was renamed Brookfield Asset Management Inc.
A few actions taken by Bruce Flatt and his colleagues transformed the company from its cyclical mining assets to the industrial giant we are semi-familiar with today. He liquidated most of their mining stake, which had made the company cyclical, and used the proceeds to fund investments in renewable energy and global infrastructure. He said mining is fine for speculation but not for long-term capital compounding.
The team noted that while governments have historically funded a large portion of this infrastructure, most nations will require private financing for these expenditures, given that governments presently have the greatest debt-to-GDP ratios. As a result, governments have fully begun to support private industry and will probably use private resources to create infrastructure. To execute deal flow at a scale other companies could not do due to their stringent investment mandates and lack of operational competence, BN had a competitive advantage in that they could finance these acquisitions using their cash flows and bring in third-party funding.
Today's company may be thought of as a combination of two engines. Their first pillar is the capital allocator, followed by the asset manager.
Capital Allocator: Brookfield Corp (“BN”) and Brookfield Reinsurance (“BNRE”)
The Capital Allocator's primary responsibility is to optimize the allocation of around $200 billion of proprietary capital and annual cash flows generated from their businesses. This includes investments in various companies, funds, and assets such as Brookfield Property Partners, Infrastructure Partners, Renewable Partners, Business Partners, and Reinsurance Partners. Nicholas Goodman has been appointed President and Chief Financial Officer. He will be in charge of allocating capital among the operating businesses and new business initiatives. Brookfield Reinsurance, which holds the company's insurance activities, has over $7 billion in equity capital and around $40 billion of assets. Sachin Shah will continue as CEO of the board of Insurance.
Asset Manager: Brookfield Asset Management (“BAM”) - Distribution of 25% Interest in Brookfield’s Asset Management Business (Letters to Shareholders Q1 2022 | Nov 22, 2022 Press Release: Sep 23, 2022 Press Release )
It's official: the Asset Manager is here to take over and manage a whopping $750 billion of assets! And the best part? Every current BN shareholder gets a piece of the pie. This new entity will be staffed by most of the 2,200 investment and support experts currently working with Brookfield. Mark Carney will be the boss of BAM, with Bruce Flatt continuing as CEO. BAM will also hold onto Brookfield's 64% share of Oaktree Capital Management, run by the dynamic duo of Howard Marks and Bruce Karsh. The goal? To make some serious cash for clients without taking on any unnecessary risks while providing the highest quality service and constantly innovating the investment process. Sounds like a win-win to us!
Track Record and Capital Allocation
BN's diversified portfolio for its size is one of its key advantages. The firm has been able to weather economic downturns and produce reliable profits because of its diversity. The business has interests in various asset classes and geographical areas, which gives it a sizable revenue stream and lessens its vulnerability to any particular market.
The talented management group at BN is another critical asset. The firm's management team has a proven track record of effectively finding and implementing investment opportunities, with a combined expertise of over 20 years in the field. This knowledge has assisted the business in giving shareholders strong returns.
The group made several profitable investments, but the next two ventures highlight their aptitude for identifying and concluding significant lucrative transactions:
Residential Property in the UK. They created, developed, and bought student housing buildings in the UK for seven years, growing their portfolio to the third largest in the nation. Student Roost, an operating business they built from the bottom up with 26,000 beds, has grown to be a sought-after asset for many purchasers. Enterprise value was £3.3 billion when they sold the business. BN invested £700 million in this property, which will eventually bring in £1.8 billion, resulting in a profit of $1.6 billion – a return of 2.7 times their initial investment and an internal rate of return of 25%.
Power Transmission Lines in Brazil: In 2016, BN submitted a bid for a concession to construct transmission lines for electricity in Brazil. These lines transport much-needed renewable energy from Brazil's northern region to the nation's industrial core. Five of their nine concessions, totaling over 2,400 kilometers of cables, have been finished. The group settled on a price of about US$1.5 billion for the five concessions, yielding a 2x capital multiple and a 22% internal rate of return.
BN is fiscally slaying it with its impressive cash flow generation and balance sheet, allowing them to make strategic investments and distribute dividends to shareholders like a boss. Their low debt-to-equity ratio and high credit rating mean they can finance future expansion without breaking a sweat. Basically, BN is the financial king of the jungle.
BN has a strong management team, a diverse portfolio, and sound financials. An attractive investment option for investors seeking long-term growth and income, the company's broad portfolio and concentration on alternative assets provide a competitive edge in the market.
Valuation and Stock Price
To conclude, BN has a solid foundation and a bright future. With revenues of $81 billion, net income growth of over 100%, and a strong balance sheet with a total liabilities-to-assets ratio of 0.68 and a healthy cash position of $11.3 billion, the company has no shortage of growth opportunities, particularly in the renewable power and infrastructure sectors. However, it's important to remember that it is not a mini-Berkshire Hathaway and should be analyzed accordingly.
Its market capitalization of $50 billion and share price of $30.87 may initially seem attractive. Still, it's essential to dig deeper and consider a sum of the parts valuation to get a complete picture of its value.
Now, let's say you were a detective trying to solve the mystery of this company's true value. You've gathered all the clues and pieced together the puzzle, but just when you think you've solved it, you realize there's one more key piece missing. You frantically search through your notes, and finally, there it is - the sum of the parts valuation. With this final piece in hand, the picture becomes crystal clear. You can confidently conclude that this company is a solid investment opportunity. Ah, the satisfaction of a job well done.