Brookfield Asset Management
Board: Berkshire Hathaway
I'm very interested in brookfield as an investment . . . Is it a buy,sell, or to hard to call?
Well, you asked, so you're going to get my Brookfield spiel. Those who have heard it should click "Next" now.
Bruce Flatt and his team in Toronto are the least understood of the big, publicly-traded capital allocators. In large part this is because the accounting is truly byzantine, or so I'm told by people who don't find all accounting byzantine.
It's also because before it changed its name to Brookfield in 2005, it was known as Brascan (BRAS-il - CANada; it started as a Canadian developer of hydroelectric projects in Brazil more than a century ago) and had a number of controversies associated with its colorful chief, Jack Cockwell, the architect of the Bronfman family fortune. Aggressive accounting was among the allegations when Cockwell was forced to sell assets to raise cash in the 1990s.
Flatt, who took over in '02, is about as different from Cockwell personally as he could be. He avoids the limelight as if it carried the plague. He does very occasional interviews, in which he's generally quite dry and boring. Kinda like his statement accompanying Q2 earnings:
“We are continuing to see clients allocate an increasing portion of their capital to Brookfield’s real asset investment strategies due to the superior risk-adjusted returns generated by these assets. Our flagship listed partnerships and private funds are well positioned to deliver long-term performance for clients and shareholders.”
In his letters to shareholders, he is somewhat more expansive, laying out a continuing and cogent case for individual investors to hitch a ride with what is now a global manager investing in alternative assets -- something other than stocks and bonds -- alongside sovereign wealth funds and other very well heeled investors. From the 2013 letter:
Over the next 10 years, our view is that interest rates will
remain at levels that are supportive of a shift away from
traditional bond investments towards higher yielding
alternatives such as real assets. These types of assets generate
strong cash flows, have equity-like features with growing cash
flows and have inflation protection. As a result, we continue
to see institutional investors shifting capital into real assets,
particularly towards platforms that are flexible enough to
capitalize on relative valuations across the global landscape.
This strategy should not come out of left field for Berkshire shareholders. Warren Buffett's growing commitments to rail (BNSF) and energy (Berkshire Hathaway Energy, formerly MidAmerican) are very similar to Brookfield investments.
Brookfield's structure is complicated. There are four listed entities: BAM is the mother ship. Brookfield Infrastructure Partners (BIP), Brookfield Renewable Energy Partners (BEP) and Brookfield Property Partners (BPY) are the daughter ships, structured as MLPs for tax purposes. Then there's a private equity fund and periodic sector funds that invest alongside the listed entities.
As a result, there are transactions among these entities that sometimes raise questions about conflicts of interest, much as the recently-announced Kinder Morgan restructuring does. A little more than a year ago, the Southern Investigative Reporting Foundation wrote a long report on Brookfield's accounting entitled, The Paper World of Brookfield Asset Management. It began like this:
The Southern Investigative Reporting Foundation began a full-time investigation into Brookfield's far-flung operations in late fall. Our reporting and research uncovered a series of earnings quality problems, the presence of a mostly hidden ownership group that effectively controls Brookfield's governance and corporate structure, and a business model that involves heavy reliance on related-party transactions with its subsidiaries.
Few companies bear a structure as complex as Brookfield's: Analyzing the company's organizational tree and its web of entities, stakes, partnerships and operating companies is to behold the work of gifted accountants and lawyers. Similarly, Brookfield's financial filings are mind-boggling in their complexity.
A brief glance at a stock chart, which shows that Brookfield's share price has been on a fairly steady climb from a low of $11 in 2009 to almost $40 in recent months, might give credence to the argument that the labyrinthine structure works.
No one doubts that Brookfield's share price performance has pleased investors, but how it is achieved should matter.
Not being an accountant, I had little context for these allegations. Are they serious or are they one step up from a Seeking Alpha hit piece? I went on the Deranged Monkey Criticism board to ask because a bunch of people who manage money professionally hang out there, but nobody responded. I think studying Brookfield's accounting and trying to value the company is a very daunting task, even for people who know what they're doing, and this is why it has not attained the popularity among individuals looking for value-oriented investment managers of those who have not performed as well in the period since Flatt took control.
The main criticism of Brookfield that I've seen on the boards has to do with its enormous aggregate debt. It was suggested more than once that it was a house of cards with all that debt ready to demolish it.
In fact, Brookfield came through the financial crisis of 2008-09 bigger and stronger than before because of its ability to aid in the recapitalization of assets that had been over-leveraged and couldn't keep refinancing once the credit markets froze. Its stake in General Growth Properties, the second-largest shopping mall operator in the U.S., came entirely out of a great recession restructuring, as did BIP's stake in a big portfolio of Australian port assets.
If you go to the Brookfield web site, you'll see rolling screen-wide shots of downtown skylines, hydroelectric dams, sea ports and electrical transmission lines. These are the assets they buy and operate. They finance each with a mortgage secured by the cash flow from long-term contracts with customers. If the asset should default, and I can't think of the last time that happened, that asset alone would be at risk. So the aggregate debt is both a meaningless and very scary big number, but the debt at the corporate level is quite routine. More than 90 percent of Brookfield's aggregate debt is non-recourse to the corporation.
The fundamental appeal of Brookfield is that it invests in sure things. Big companies will keep leasing office space; renewable energy has enthusiastic customers as far as the eye can see; transmission lines will continue to carry it; world trade will require sea ports and railways; private toll roads are a growth business. It invests in the basic infrastructure of humanity. In an age when many deeply-leveraged governments are looking to sell assets and raise cash, Brookfield is in a position to benefit. It has taken advantage of historically low rates since the panic of '08-'09 to refinance much of its debt at rates that improve profit margins. Average coupon on the corporate-level debt was 4.5 percent at the end of last year.
Because of all this, it keeps attracting capital and extending its reach. Its stock market performance over the past ten years has been about double Berkshire's. It's a $29 billion company that brings a value perspective to the assets it buys. Flatt and his team love to shop in out-of-favor neighborhoods of the world.
I own 'em all -- the daughter ships for the income and the mother ship for the growth. The stock behaves a bit like Berkshire's in the sense that it will sit at one level a while and then, in a rather short space of time, it will move to another and sit there a while. It was badly outpaced by the S&P in 2013, but it's up this year from $38 to $48, about four dollars of it this month. So I'm not sure I'd pick this particular moment to buy, but I view it as a core long-term holding.
I'd still love to hear from someone with accounting expertise willing to look at Brookfield's reporting and the critical findings by the Southern Investigative Reporting Foundation and offer whatever conclusions that expertise provides. Brookfield responded in two ways -- directly, in a letter to the foundation responding to its questions at the time, and then countering the suggestion it was too complicated to understand by emphasizing the simplicity of its value proposition repeatedly over the course of the next few quarters.
Tom Gayner's enthusiasm for Brookfield management confirms the impression I have from listening to Flatt numerous times -- very smart guy, very focused on the application of his value sensibility to worldwide real assets, not a great cocktail party guest. Hey, you can't have everything.