In the Q4 shareholder letter issued today, BAM floated the possibility of spinning out part of its asset management business in order to capture the higher multiples Mr. Market is offering to asset-light managers.
The letter made it sound like a trial balloon intended to get investor and shareholder feedback:
As we consider these options (including possibly doing nothing), we will report in the quarters/years ahead—and will be pleased to hear any views that you have.
On the conference call, Bruce Flatt made it sound less speculative:
The bottom line is we think it’s a very executable plan. It’s now in the public, all of our owners can express their views to us and we are going to come up with the right plan based off of all that plus the information we have. So, we are heading down a path, and we are quite serious about it, or we wouldn’t have put it in the letter the way we did.
The nomenclature is a little confusing. How do you spin out the asset management part of a business called Brookfield Asset Management? The reasoning goes like this: For most of its history, Brookfield’s asset management business has largely been in service of assets financed with Brookfield’s own capital. They made money through operational revenues and capital appreciation. Those assets sit on the balance sheet and create an “asset-heavy” manager.
In recent years, charging custodial and performance fees for managing assets financed with outside capital – acting more like a traditional private equity house – has become the largest and fastest-growing part of the business.
Brookfield looks around at “asset-light” managers – private equity firms that return the lion’s share of profits to shareholders in dividends or share buybacks – and believe they enjoy more generous valuations in public markets. I’m not sure this is true across the board, but it is for Blackstone, the biggest player, whose current market cap represents about 24x trailing 12-month fee-related earnings.
When Brookfield attached a 25x multiple to fee-related earnings as part of its plan value calculation, the number was generally viewed as excessive and last year Brookfield abandoned the calculation.
In the midst of the massive transition now underway in institutional finance from fixed income to alternative assets, long-term growth rates are hard to estimate. Blackstone’s fee-related earnings were up 71% last year, about half of that performance fees. BAM’s actual FRE and net carried interest were up 47%, although the “annualized” increase, which includes a variety of adjustments, was lower.
It’s anybody’s guess whether an asset-light Brookfield ticker would enjoy the multiple that Blackstone gets, but it might well do better than the FRE multiple implied in BAM’s current valuation, which is less than 15x. Management believes the market has trouble valuing BAM because it is essentially two different businesses now – an asset-heavy investor and an asset-light manager.
Based on its analysis of multiples awarded to comparable asset-light managers, Brookfield thinks that part of its business would be valued at $70B-$100B, or $45-$60 a share, and the legacy balance sheet investments at around $50B, or roughly $30 a share.
That would not be the allocation between the tickers because the tentative plan is to spin out only part of the asset-light business, enough to derive a pure-play multiple for the new ticker, with BAM holding onto a significant stake, as it has with its other subs. If the asset-light ticker did earn a higher multiple of FRE, BAM’s retained share of that business might also be rendered more valuable.
BAM generally follows through on plans such as this once it goes public with them, so I would not be surprised to see this happen later this year or next.