Brookfield weighs standalone asset management business

Toronto-based firm's CEO says that a separate public company could unlock shareholder value

Brookfield weighs standalone asset management business
Steve Randall

Brookfield Asset Management is considering whether it should spin-off its fee-earning operation into a separate company to its directly held assets.

The Toronto-based firm currently operates its asset management business and other operations under one umbrella but says that a simplified structure could deliver better value for shareholders.

The revelation has come in a letter to investors which highlighted the firm’s record total net income generation of US$12.4 billion in 2021, up from $707 million a year earlier.

The firm’s fourth quarter results, published Thursday, also showed a $1.1 billion net profit for common shareholders, up 74% year-over-year, with a dividend of 14 cents, up from 6 cents a year earlier.

The letter from CEO Bruce Flatt specifically highlighted the strength of the asset management business which resulted in $6.3 billion in total distributable earnings, up almost 50% year-over-year.  

Alongside the fee-earning assets of $364 billion that Brookfield manages for institutional investors, the firm has around $50 billion of equity capital that it has invested in the business over the decades.

The fee-earning part of the business would likely have an equity value of around $70-100 billion according to the firm’s analysis (and that does not include its $50bn of equity capital invested in its business).

Flatt and his team are considering whether a separate company, with that kind of valuation, would be attractive to investors, especially those who do not want exposure to the growing parts of the wider company.

Asset light vs asset heavy

There is also a valid argument for offering shareholders an ‘asset light’ option.

Brookfield is ‘asset heavy’ because it has built up its own investments over a long period through investment of retained profits and growth in asset values.

Many competitors – such as Blackstone - have virtually none of their own assets, either because they are newer entities or have distributed profits to their shareholders.

Flatt said that while long-time Brookfield shareholders understand how the firm’s own capital is used for its investments, those with less knowledge must determine both the value of those assets and its fee-earning business.

“Pure-play managers have been more in vogue across global markets because they are easier to value and have attracted higher multiples,” he said.

He added that Brookfield has been solely focused on compounding shareholder capital and that, the asset management business, started only 25 years ago, would not have been mature enough to consider separating it from our capital.

But strong growth in the business has changed things.

“Our asset management business is now one of the largest and fastest-growing scale alternative investment businesses globally,” he said, adding that the added benefit of having “the longest duration of annuity-like cash flows of any asset manager” means a simple separation from the firm’s capital is possible.

What happens now?

There are many questions yet to be answered.

These include whether the spin-off company would be private or public, how much of the business would be included, and how shareholdings would be impacted.

But the biggest question of all is when the separation may happen – if at all.

Flatt states that investors will be kept updated in the quarters and years ahead but makes clear that one option is “possibly doing nothing.”