Derek Decloet
Thu, December 22, 2022
(Bloomberg) -- Brookfield Asset Management Ltd. has had a bumpy start as a standalone public company. That may represent an opportunity for investors, according to some Wall Street analysts who are picking up coverage of the firm.
Brookfield Asset has dropped roughly 13% since it began trading in New York on Dec. 12. It was spun out from its parent, now called Brookfield Corp., to create a investment-management company that intends to pay out the vast majority of its earnings in dividends.
The Canadian firm runs about $400 billion in private funds and other investment strategies, making it the world’s No. 2 alternative asset manager. Its funds have a strong tilt toward credit, infrastructure and hard assets and an aggressive growth target — $1 trillion in assets by 2027.
“They kind of are in the best place to be right now,” Goldman Sachs analyst Alex Blostein said in a phone interview. “Within private markets, the two things that really resonate today are credit and infrastructure. And then within infrastructure, there’s a tremendous amount of focus on clean energy.”
The goal of the spinoff is to get a higher multiple for the fund-management business then when it was embedded in a conglomerate. It should trade at around 20 times earnings or more, Blostein said, based on the valuations of peers including Blackstone Inc. and Ares Management Corp.
Goldman rates Brookfield Asset a buy with a $40 price target; that would imply 42% upside from Wednesday’s close of $28.20. The average price target of analysts tracked by Bloomberg is $34.35 with five rating it a buy and four saying hold. None recommend selling the stock.
Brookfield is counting on credit to drive much of its growth after it acquired Howard Marks’s Oaktree Capital Group three years ago and expanded its insurance business. Brookfield’s real estate funds and private-equity group may become relatively less important to the overall business, according to a company presentation.
Some of the asset growth may come through acquisitions, Chief Executive Officer Bruce Flatt suggested at a Goldman conference earlier this month. Having its own stock will make it easier for the asset manager to make deals, “if opportunities come along that we think are as good as what we have,” said Flatt, who’s also CEO of Brookfield Corp.
There are, however, a few hurdles to cross on the way to $1 trillion. In the short term, higher interest rates may be one of the biggest.
Toronto-based Brookfield has thrived as it built up an investment track record that attracted heaps of capital from large pension and sovereign wealth funds seeking stable, cash-producing assets like utilities and toll roads as an alternative to bonds. The sharp rise in government yields has taken the shine off such alternative strategies.
“BAM benefited significantly and grew massively in very large part, in our opinion, due to ever declining interest rates that enabled them to attract more and more capital,” said Dimitry Khmelnitsky, head of accounting and special situations at Toronto-based Veritas Investment Research Corp.
Khmelnitsky sees rates as a bigger problem for alternative asset managers like Brookfield than most investors are factoring in. All of Brookfield Corp.’s publicly traded divisions have underperformed the S&P 500 in this year’s rate-driven equity selloff.
As a result, the analyst thinks Brookfield Asset Management should trade at a more modest valuation of 15 times earnings — which, he adds, is not far off from the multiple that Brookfield paid to acquire Oaktree in 2019.
Other analysts don’t see rates as a major roadblock for Brookfield, especially given that it’s not that reliant on private equity, where a shortage of debt financing has slowed down dealmaking.
“If we look on a longer time frame, rates aren’t really that high in a historical context,” Credit Suisse analyst Andrew Kuske said. Brookfield Asset “is a very large business and has very good momentum on a number of fronts — on fundraising, deployments, client reach.”
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