FIVE WAYS to BUY INTO BROOKFIELD
BROOKFIELD’S LAYERED STRUCTURE GUSHES FEES TO PARENT BROOKFIELD ASSET MANAGEMENT AND PROVIDES INVESTORS WITH MULTIPLE OPTIONS, SUCH as BROOKFIELD PROPERTY PARTNERS, BROOKFIELD INFRASTRUCTURE PARTNERS, BROOKFIELD RENEWABLE ENERGY AND RECENTLY LAUNCHED PRIVATE EQUITY ARM BROOKFIELD BUSINESS PARTNERS. WITH 18% AVERAGE ANNUAL RETURNS SINCE 2008, INFRASTRUCTURE LEADS THE PACK.
Growth, ponying up $2.5 billion for a 26% stake, one of the seminal investment scores of the crisis. So far it has yielded Brookfield and its investors $10 billion in profit. Flatt remains chairman of General Growth, and Brookfield is a 35% shareholder.
“We didn’t get in trouble before the crisis, so we were able to continue to grow and we were running fast coming out,” Flatt says. “We could move money where money was needed.”
As brilliant as Flatt’s purchases were his exits. Beginning in 2008, he took each of his divisions public on the NYSE (separate from the already public real estate arm, now known as Brookfield Property Partners). First, infrastructure (Brookfield Infrastructure Partners), then renewable energy (Brookfield Renewable Partners), then the private equity arm (Brookfield Business Partners). All this in addition to the holding company itself, Brookfield Asset Management. Collectively, Brookfield’s five public entities carry more than $70 billion in public market value.
The holding company’s stakes in the four derivative companies range from 30% to 75%, forming a byzantine structure that feeds the parent with a perpetual and growing stream of cash, since it gets fixed fees plus a 1.25% annual management fee based on the value of its listed partnerships and performance fees of 15% to 25% based on the level of
the dividends. Fold in its dozens of private funds, and Flatt’s flagship found itself generating $1.1 billion in fee revenues, up 31% year-over-year and a 160%-plus gain from 2012. Brookfield predicts it will generate $2.4 billion in annual fees by 2021.
Besides the annuity of charging people to manage their money, this structure also carries a big tactical advantage. Because permanent capital is built into its public vehicles, roughly half of Brookfield’s funding never has to be returned to investors, allowing it to compound investments and build more muscle and flexibility than almost any investment firm on earth. “These are lifelong entities,” Neuberger Berman’s Charles Kantor says. “I think that was brilliant.”
One distinct difference between Brookfield and Berkshire Hathaway: While Buffett’s annual shareholder meeting is basically a carnival of capitalism, Brookfield’s annual investor meeting is a sober gathering of suits. There are no members of the press or doe-eyed fans, just financial analysts and money managers with sharpened pencils ready to absorb head-spinning financial math that is both Brookfield’s strength and its Achilles’ heel.
At the start of his presentation, Flatt strolls to a podium: “There’s really nothing different that we’re doing or we’re proposing to do with this company, and essentially nothing has changed.” But this humility is a ruse. Brookfield had a banner 2016, and he’s brimming.
“The numbers are bigger, money has been raised faster, and therefore the returns should be higher and come quicker,” he says.
First the money: Infrastructure has become Wall Street’s hottest product—in 2016, $62.5 billion was raised at 59 infrastructure funds— and Brookfield has first-mover advantage. Over the past year, Brookfield closed $27 billion in private funds, one of the biggest gatherings of cash in the history of Wall Street, led by $14 billion for infrastructure investments and driven by Brookfield’s network of 450 sovereign wealth investors, pension funds and endowments.
There were also more deals: $18 billion was spent mostly in markets where investors see calamity but Brookfield’s flexibility allows it to buy. Brazil, roiled by a recession and a corruption scandal, has been a key Brookfield target. So far, Petrobras sold it NTS, the country’s pipeline giant, for $5.2 billion—brookfield’s ability to close without financing conditions was the key to the deal. Then it agreed to buy a 70% stake in the nation’s largest private water and sewage company, Odebrecht Ambiental, whose holding company CEO was carted off to jail in 2016. Some $6.9 billion was spent alongside partners to buy Australia’s biggest rail-freight and container-port operator. Berlin’s Potsdamer Platz, once a no man’s land by the Berlin Wall, was acquired for a reported $1.4 billion. Now Brookfield is helping Macy’s come up with a plan to extract value from its vast real estate, as its CEO departs amid plummeting shares and a battle with a hedge fund activist. In March, Brookfield struck a deal to take control of Terraform Power and Terraform Global, the crown jewel solar and wind assets of bankrupt Sunedison.
All told, Brookfield is on a 100-transaction-a-year pace, fed by 700 global deal scouts. Flatt presides over small teams that review each deal. He boasts that he hardly ever turns down a pitch because the firm’s strict underwriting standards have been institutionalized over many decades.
These executives forgo the kind of immense overnight riches that partners sometimes get at private equity firms and take the slow-but-steady path, gained by appreciation of its stock. In this model, Flatt and his team, unlike at so many funds, are largely aligned with their investors. Insiders own roughly 20% of Brookfield Asset Management; Flatt’s $1.2 billion in holdings is the largest stake, while others, like former CEO Jack Cockwell, hold interests in the hundreds of millions.
Despite its long-term call on global productivity and growth, Brookfield carries risk. During the crisis in 2008 and 2009, as Flatt was doubling down, Brookfield’s stock plunged more than 70%. Bribery and corruption remain an issue for a company running so many arteries in so many countries. In 2012, for example, Brookfield was hit with a civil lawsuit in Brazil, as well as an SEC and Department of Justice investigation for alleged bribery by some of its employees. The SEC and DOJ investigations closed with no charges.
There are also geopolitical risks. The $5.2 billion pipeline deal was suspended in February by a Brazilian court; a phalanx of lawyers challenged the injunction and had it overturned. And unexpected events like Brexit roil projects like Canary Wharf, which Flatt finally took control of in 2015.
But Flatt figures to have a solid two-decade time line to see his projects through (or much longer if he continues to emulate Buffett) and a corporate mandate that matches such patience. “Brexit may happen over the next ten years. But London is still going to be one of the great cities of commerce,” Flatt says, noting that a high-speed railway will soon connect Heathrow to Canary Wharf in 40 minutes. “Over the next 20 years, we are going to make an enormous amount of money.”
half of brookfield’s funding never has to be returned to investors, allowing it to compound investments and build muscle and flexibility.