This week we’ll go over an acquisition by Brookfield Asset Management (TSE:BAM) that confused many of our members, primarily because there was news that it purchased renewable energy assets.
But first, one other item of business.
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Brookfield Asset Management and a renewable energy business
Before we start here, Mat and I made a considerable effort to try and make this as easy as possible to digest. Brookfield is a complex business with several moving parts. Although we did our best to simplify things, it is still likely this could leave some members confused.
However, we feel the commitment taken to understand Brookfield’s business model is a path well worth venturing down, as we believe it is one of the strongest companies in the country for investors looking at the long-term.
As always, utilize our Q&A with any Brookfield or investment questions. Our Q&A is quite possibly one of the most powerful features here at Stocktrades.
This past week, the Globe and Mail (via the Financial Times) reported that Brookfield Asset Management (BAM) was acquiring one of the UK’s largest renewable energy developers – Banks Renewables. According to sources, the Durham-based company is being acquired by BAM for US $1 billion.
Banks Renewables “owns and operates wind farms in northern England and Scotland, and also has a large portfolio of onshore wind, solar and battery assets in development.”
It is important to note that the deal has not been formally announced, so we wouldn’t consider it a done deal yet. That said, it led to several questions from members with respect to the relationship between Brookfield Asset Management and Brookfield Renewables (BEPC, BEP.UN).
The one question that stands out is, “Why would Brookfield Asset Management buy renewable assets, and not Brookfield Renewables?”
With that in mind, we thought it would be an excellent opportunity to clarify Brookfield’s structure before answering this, as the Brookfield suite of companies certainly isn’t the easiest to understand.
First, let’s refer to the following chart (courtesy of RBC), which visually depicts Brookfield Corporation’s (BN) structure following the split of Brookfield Asset Management (highlighted in red).
Brookfield Corporation trades under the ticker BN and is the parent company. As depicted in the chart above, you’ll see the ownership percentages of each separate Brookfield company.
For example, it owns a 48% stake in Brookfield Renewables, trading under the ticker BEP.UN, a 75% stake in Brookfield Asset Management, trading under the ticker BAM.TO, and a 27% stake in Brookfield Infrastructure, which trades under the ticker BIP.UN.
You’ll notice that the companies in which it doesn’t own a 100% stake are publicly traded.
Side note: some of you may recognize the 100% stake it has in Brookfield Property Group, which was once a publicly traded company under the symbol BPY. After years of underperformance, Brookfield swooped in and acquired 100% of the company at discounted prices.
Brookfield Corp is considered an asset manager and has three core business segments: Asset Management (which includes its stake in BAM and principal investments in funds managed by BAM), Insurance Solutions (through Brookfield Re-insurance), and Operating Businesses (reflective of its stakes in BEP, BIP, BBU, and the former BPY).
We believe owning BN is the best way to get full exposure across the Brookfield suite of companies. Given its diversification, it is akin to an ETF, given the broad global exposure.
The company operates in 30+ countries, and combined, their business segments have $135B in capital.
The issue a lot of investors have lies in the need for yield. Which, depending on where you are at in your investment timeline, can be a relevant issue. Brookfield Corporation does not yield much, while its subsidiaries (BEP, BAM, BIP) have attractive yields.
Now, let’s shift gears and first talk about Brookfield Asset Management, which is the source of most of the confusion
First, this used to be the name of Brookfield Corporation and was the overarching parent company. You may remember it trading under the BAM.A.TO ticker.
Last fall’s split and subsequent introduction of the corporation still confuses many today.
Adding to the confusion, Brookfield Asset Management is also considered a global asset manager. It has ~$850M in assets under management, making it one of the largest asset management companies in the world.
Now, let’s talk about what makes BAM different from BN and why it would “buy” a renewable company.
Brookfield Asset Management “manages a range of public and private investment products and services for institutional and retail clients. We earn asset management income for doing so and ensure strong alignment of interests with our clients by investing alongside them”.
We’ve bolded a couple of keywords in Brookfield’s company description. The company manages investments and earns asset management income. This means that while the company might invest alongside some of its clients, it isn’t in the business of buying, owning, and operating companies in the traditional sense.
How Brookfield Asset Management generates profit
The company generates profit by earning fees on third-party capital raised and managed on behalf of private fund clients and from its managed public funds. This capital is called “Fee Bearing Capital,” which we will call “FBC” from here on out.
As of last quarter, BAM had $432B in FBC, which includes invested and pledged amounts. It expects FBC to grow at an 18% annual pace through the next 5 years. The net fees BAM generates on FBC are referred to as “Fee-Related Earnings,” which we’ll call “FRE” from now on.
As per Brookfield’s definition, FRE represents fee revenue “less direct costs associated with earning those fees,” which includes your standard expenses like technology and employee costs, professional fees and taxes. Through 2028, BAM expects FRE to grow 17% annually.
In effect, the company raises capital through its various funds and then re-invests those funds into various business ventures. In the beginning, the company didn’t make principal investments and, as a result, was an ‘asset-light’ company. However, that strategy seems to have shifted as it has now begun to invest alongside private equity.
This brings us back to what started this whole conversation: the article by the Globe and Mail.
The Globe picked up on a Reuters article that was a simple summary of the Financial Times article. The Reuters piece said:
“Canadian investment firm Brookfield (BAM) is buying the renewable-energy division of Banks Group.”
However, it failed to pick up on one crucial detail of that Financial Times article
The deal is being done by BAM’s second Global Transition Fund (BGTF II). Little details matter, and this omission, while it may have seemed small, puts everything into perspective.
Let us explain.
The company’s first Global Transition Fund (BGTF I) raised $15B in 2022 and deployed 85% of its capital as of the last update.
As a result, the company kicked off fundraising for BGTF II this past June. While it has not yet made any firm announcements, it has said that fundraising is off to a “strong start,” and it is confident that this round will be larger than the first.
How does this answer the BAM over BEP question? We are getting there!
First, for our members who are Brookfield Renewable Partner shareholders, does the Global Transition Fund (BGTF I) sound familiar? It should. Through this fund, BEP took a 51% stake in Westinghouse, the nuclear fuel and reactor company it bought in partnership with Cameco.
From the linked press release above: “Brookfield Renewable is pursuing this opportunity through the Brookfield Global Transition Fund I (“BGTF I”), which is the largest fund in the world focused on the energy transition.”
To make matters even more interesting, Westinghouse was bought from Brookfield Business Partners (BBU), which is effectively Brookfield’s private equity firm. BBU bought a distressed Westinghouse back in 2018, turned it around and booked a 6x return on its invested capital for a 60% internal rate of return and $4.5B in profit.
As you can see, it is all interconnected, and that is why Brookfield’s scope and scale are a competitive advantage. There are many levers the company can pull to invest and recycle assets.
As for this ~ $1B takeover of Banks Renewables, if the Financial Times reporting is correct, then it is quite possible (could even go as far as to say likely) that Brookfield Renewable is involved to some extent.
Much like it made its investment in Westinghouse through BGTF I, it could take a stake through BGTF II.
Since Brookfield declined to comment, we are light on details at the moment. It is also possible that BAM itself is invested, but that would depend on whether it contributed its own capital to the BGTF II fund.
As mentioned previously, during the company’s annual investor day, it announced that it was planning on contributing its own capital, which is a shift in strategy.
As you can see, the answer with Brookfield is never simple
We’ve tried to explain this in as easy of a format as we can, and I’m sure many members will still find this confusing.
However, once you really understand the company’s inner workings and connect the dots, you begin to realize the company’s true power and why Brookfield is one of the most recognized global asset managers.
