2023-05-16 12:51:57 ET
Summary
- BAM is an easy to understand, asset-light, dividend-paying business with a huge growth potential.
- It's very likely to become investors' favourite which is why it trades at a relatively high multiple.
- Still, I think there's plenty of upside to be had, which is why I rate the company as a buy.
So far my entire coverage has revolved around REITs, but recently I started looking into alternative asset managers as well. The reason is simple, the sector is expected to grow rapidly over the rest of the decade as the industry is able to capitalize on almost all recent trends from renewable energy, through AI to private credit. Moreover, the private credit division could benefit significantly from the current banking crisis which has tightened traditional credit markets. These tailwinds feel too good to ignore which is why I want to start coverage on one of the most promising alternative asset managers out there – Brookfield Asset Management ( BAM ) and why I’m seriously contemplating making it the largest position in my monthly investment bucket.
Brookfield’s reputation precedes them so really they need no introduction. The entire empire starts at Brookfield Corporation ( BN ) which is essentially a holding company for all the other funds and a 75% shareholder in BAM. The remaining 25% has been spun off last fall and offered to investors directly. There is speculation on why exactly Brookfield decided to let investors invest directly into arguably their best asset. Personally, I think it was to boost the valuation of BN which holds 75% interest in the asset manager. In any case, the spin off gives us a chance to invest into the asset light asset management business which is very easy to understand and forecast and earn solid dividends in the meantime. This is because BAM targets a 90% payout ratio making essentially a yieldCo.
So first off let’s look at the business and understand what drives performance. As I said, it’s fairly simple. BAM gets money from outside investors, allocates it into other Brookfield funds and gets to keep a fee for doing so. The fee averages about 1% and Brookfield gets it whether investors make money or not. So really the main driver of business for Brookfield is their ability to grow the capital to manage, called assets under management ((AUM)) so that they can charge their fees on a higher base. The great thing is that the company has a history of growing their AUM pretty significantly and expects this to continue as management guides towards 15% growth in fee-related earnings for at least the next 5 years, but potentially for decades to come. This sounds too good to be true, but the thing is that management claims that they have very good visibility and a significant portion of this growth is already locked in. Not only that but they also have a history of overdelivering on their guidance.
All of this is exciting, but first, let’s have a look at their Q1 2023 earnings in more detail. In short, they were good. First of fundraising has understandably slowed given the current economic slowdown as BAM raised $13 Billion in Q1, below $15 Billion in Q4 and below the 2022 quarterly average of $23 Billion. Still, fundraising remains solid and drove fee bearing assets under management growth to 14% YoY (only marginally below the 15% guidance).
BAM Presentation
Because the company was able to maintain its industry leading margins of nearly 60% (57% to be exact) fee-related earnings increased by 11% YoY to $0.33 per share.
BAM Presentation
Those are solid numbers that have enabled the board to approve a $0.32 per share dividend which at the current price translates into a yield of about 4%. That’s a great yield when you consider that it could easily grow by double digits for the rest of the decade. If management can deliver on their 15% growth target, your yield on cost by 2030 could surpass 10%! And I think this is very achievable. And the current economic slowdown could actually help the company acquire some great assets at discounted prices. They definitely have the liquidity to do so with uncalled commitments of nearly $80 Billion ready for deployment, which according to management is enough to secure about a third of the forecasted growth for the next five years. Oh and I didn’t even mention that the company has no debt.
As such, this could be a very rare opportunity to buy a relatively safe stock that could easily return 15%-20% annual returns for at least the next 5 years, if not decades. Of course, one should be aware of the risks also. The main one being a severe depression in which management would like not be able to raise enough new capital to reach their goals. But I think even if management underdelivers and only grows AUM by 10%, the investment is still worth it if we can buy the stock at a reasonable price.
Right now, the stock is a little pricy, but as they say quality never comes cheap. The best metric to value asset managers is arguably price to fee-related earnings. BAM currently trades at 25x, compared to Blackstone ( BX ) which trades a little bit lower at 23x. While that’s high, it’s not crazy high for a company expected to grow so fast. A multiple below 20x would definitely scream cheap and as long as we’re between 20x and 25x I’m comfortable with the valuation. That’s why I rate the company as a BUY. I won’t set a price target, because I think this stock is worthy of being a long-term holding and I plan to buy it, hold it for at least a decade and let my dividend grow in the meantime.
For further details see:
Brookfield Asset Management: Double Digit Return Potential