This weekend's Barrons has a very positive write up of BAM.
SATURDAY, FEBRUARY 24, 2007 6:36 a.m. EST
A Different Kind of Buyout Firm
By MICHAEL SANTOLI
PENSION FUNDS ARE DESPERATE for long-term investment income amid low
bond yields. Companies and governments are selling off their
infrastructure assets to raise capital. And emerging-market economies
are becoming resource consumers as well as producers.
Brookfield Asset Management, a low-profile but high-performance
Toronto-based investment firm, stands astride these powerful and
durable trends, having transformed itself in 15 years from a jumbled
conglomerate of commodity and financial businesses into a focused
manager of alternative assets, from real estate and hydro-power plants
to timber lands and power grids. Its deal-making expertise,
value-investing discipline and long-term perspective have generated
superior returns on capital and extraordinary profits for
shareholders.
Operating cash flow per share -- the preferred metric, because it adds
back depreciation on assets that don't depreciate -- grew 35% last
year, to $4.43, after rising 45% in 2005.
Brookfield's shares have more than doubled in two years, to a recent
price of $55.
With its formidable head start in the burgeoning field of
infrastructure management, Brookfield (ticker: BAM) looks
well-positioned to continue pleasing investors. Given foreseeable
cash-flow trends, the stock easily could approach 70 in the next
couple of years.
Although not well known in the U.S. -- except for its ownership of
premium office buildings through 50%-owned Brookfield Properties (BPO)
-- the company has attained a $20 billion market value and manages $70
billion of assets.
Known as Brascan until November 2005, Brookfield was founded in 1895
to invest North American capital in Latin America. It largely exited
Brazil in the 1970s, becoming a holding company with interests in
mining, timber and real estate. The last of its mining assets,
Falconbridge, was sold last year.
Bruce Flatt is president and chief executive of Brookfield, but he
runs the company as first among near-equals, also sharing the title of
managing partner with four other executives. This underscores
Brookfield's collegial culture of capital stewardship.
Only 41 years old, Flatt has been with the company since 1990, and has
been instrumental in re-imagining it as an opportunistic asset manager
of tangible, long-lived, cash-generating properties.
Flatt and his colleagues began building Brookfield's office-building
business in the real-estate recession of the early 1990s, taking on a
large slug of the properties owned by then-bankrupt Olympia &
York. (This portfolio includes New York's World Financial Center, home
to Barron's.) Brookfield's value acumen was richly rewarded as
commercial real-estate values soared in urban markets. .<br><br>As Flatt, who is based in Toronto, described the situation in an<br>interview in his New York office, the company saw its holdings had<br>benefited dramatically from declining interest rates. With rates<br>unlikely to go much lower, "we decided five years ago that we had to<br>earn an extra return," he says.<br><br>Around this time, Brookfield began to manage institutional money for<br>outsiders, in addition to shareholder funds. Today, some $30 billion,<br>or 43% of its managed assets are provided by unaffiliated<br>institutions.<br><br>Brookfield has moved some holdings off its balance sheet and into<br>discrete funds along with client money, a familiar model in asset<br>management. It has launched a new fund to invest in Brazilian shopping<br>centers, and a finance fund to invest in debt instruments and<br>distressed securities, a specialty.<br><br>Ahead of the Pack: Brookfield's size and ability to arrange debt<br>quickly have made it a leader in nontraditional assets.<br><br>While Brookfield's asset mix might look haphazard, its target markets<br>share several important similarities. They feature very long-duration<br>assets requiring only modest ongoing capital investment, with steady<br>and growing cash flows. Brookfield studies every investment sector in<br>depth, maintains a value discipline in purchasing new assets and<br>applies a sensible amount of leverage to attain its stringent<br>return-on-capital goals. It is now looking at ports, pipelines,<br>railroads and other large physical installations.<br><br>Brookfield's value standards were on display this month, when it was<br>outbid by Simon Property Group (SPG) for mall-operator Mills<br>Corp. (MLS). After doing intense due diligence on the company,<br>Brookfield bid $21 a share and provided financing. But when Simon<br>offered $24 a share, Brookfield stood down, collecting a $40 million<br>breakup fee and a $25 million expense reimbursement. It had hoped to<br>use Mills as a platform to build a larger retail real-estate<br>portfolio, but is unlikely to buy other assets in the sector because<br>prices are too high.<br><br>Flatt's insistence on buying high-quality assets at a decent price<br>rather than subpar assets on the cheap is reminiscent of Warren<br>Buffett's approach. Brookfield also shares Buffett's investment<br>horizon: "forever."<br><br>And, like Buffett, Flatt's letters to shareholders clearly set out<br>financial objectives and principles. Brookfield verges on<br>under-promising; when it over-delivers, it cautions investors to keep<br>stock-return expectations grounded. Brookfield seeks 12% annualized<br>growth in operating cash flow.<br><br>Charles Kantor, a portfolio manager at Neuberger Berman, a longtime<br>Brookfield shareholder, says, ""Management follows a very disciplined<br>and patient long-term approach to capital allocation, that focuses on<br>generating stable and growing long-term cash flow at attractive<br>risk-adjusted returns. The team enjoys a unique ability to take<br>advantage of stock- market dislocations to create wealth."<br><br>INFRASTRUCTURE INVESTING is fast becoming the next new thing on Wall<br>Street. Goldman Sachs (GS) has entered the fray with a $5 billion new<br>fund. Three big financial institutions bought London City Airport last<br>year, and Barron's has chronicled the moves by Australia's Macquarie<br>to pay up for U.S. toll roads.<br><br>The Bottom Line Brookfield's stock, now at 55, easily could approach<br>70 in the next few years.<br><br>Flatt acknowledges the growing popularity of infrastructure, and<br>concedes it could make new investments at good prices harder to<br>find. "More money [in this sector] is bad for the short-term<br>investment horizon," he says. "Longer term, we'll have all these funds<br>creating a new industry."<br><br>Flatt estimates global companies are 50% to 60% done with divesting<br>infrastructure assets, while governments barely have started.<br><br>Brookfield enjoys several advantages over rivals. It is bigger than<br>many, and can raise debt rapidly. It has experience with<br>nontraditional assets, and perhaps most important, has built the<br>operating structure around targeted industries, such as hydropower and<br>Brazilian real estate.<br><br>It takes small positions in targets to learn the business and build<br>relationships, and strives to keep existing management at acquired<br>companies. Notably, Brookfield doesn't usually take management fees<br>from the uninvested portions of client funds. Its own returns are its<br>clients' returns, an arrangement that, like much else, should please<br>both shareholders and clients for years to come.</span></td></tr></table></div></tr></td><tr><td colspan=99 class=) |
