3 Unique Threats This Asset Manager Must Navigate

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While many asset managers work to build an empire of assets under management, one firm is more focused on the management of its assets.  With a proud history of more than 100 years of owning and operating assets, Brookfield Asset Management (NYSE: BAM) is not your average asset manager. This global alternative asset manager has built its business to its present size of over $150 billion under management.

These assets are organized into Property, Renewable Power, Infrastructure and Private Equity and are focused on owned high quality “real assets.”  When I say “real assets” think of the World Financial Center in New York or a wind farm in Canada.  Think of trees, toll roads and train tracks.  Brookfield doesn’t simply invest clients' money into an interest of an asset, but directly into the asset while investing company money right alongside, and then manage that asset on an operational basis. 

The reason is quite simple; the world is starved for yield.  While bonds yield less than two percent and you’d hope to earn eight percent on equities, the yield on real assets can range from between seven and fifteen percent.  By owning and operating the asset Brookfield can be sure to earn returns on the higher end of the scale.

A yield hungry investing world creates both opportunities and risks.  Companies like Brookfield face threats that are not what you’d commonly find among its peers in the asset management world.  Brookfield faces three specific threats that it must navigate past in order to keep its business moving forward.

The Threat to its Reputation

Charlie Munger reminds us to, “remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.”  Brookfield lists its reputation and integrity as one of the four keys to success as businesses like Brookfield thrive on the reputation it has built up.  This is what has enabled management to raise 27 private funds with $27 billion of committed capital as well as three listed funds which now have market caps of more than $26 billion.  If Brookfield cannot access the capital it needs at reasonable terms it would be detrimental to business. 

Brookfield’s reputation as a world-class organization and for integrity in deal making has recently come under fire as the company is embroiled in a very public battle with Bill Ackman over the control of General Growth Properties (NYSE: GGP).  Ackman wants to see General Growth sold to fellow mall landlord Simon Properties (NYSE: SPG) and Brookfield wants to continue owning the asset and eventually seed it into its soon to be publically traded Brookfield Properties Partners. 

Ackman has made public statements which really question the reputation and integrity of Brookfield when he says that Brookfield’s, “checkered track record with minority shareholders is cause for alarm.”  This could end very badly for Brookfield if Ackman continues to publically question the company’s intentions.   Investors need to pay close attention to this drama as it unfolds.

The Threat of Poor Execution

Brookfield has spent the past half-decade transitioning from an asset owner to more of a pure play asset manager.  It separated both their renewable power business and infrastructure business, Brookfield Infrastructure (NYSE: BIP), and are now in the process of separating Brookfield Property Partners (BPY).  Ackman was very critical of their plan to spinoff BPY and took jabs at the company saying he “had fun” reading the prospectus.   Right now the stakes are too high to botch this deal.  

Brookfield needs to get everything just right with the initial offering.  It plans on spinning off a 10 percent stake to shareholders while holding the remaining 90 percent.  If shareholders instantly dump their shares it could be a very bad sign of things to come.  While Brookfield has done these spinoffs before, this one will be closely watched by the likes of Ackman.

The Threat from their Competition

Brookfield doesn’t face direct operational competition as you’ll find in most industries.  It buys assets with high barriers to entry, which are typically regulated or too capital intensive to replace.  For the most part, it owns trophy assets that are critical to economic growth.  However, in order to grow assets under management, Brookfield must continue to build or buy more assets. 

Again, with the world starved for yield, the capital being thrown at the assets that Brookfield manages is mind numbing.  Over the next decade there could be more than $15 trillion of new money flowing into real assets.  Alternative asset managers like BlackStone (NYSE: BX) have amassed $54 billion dollars in real estate assets under management and it is targeting several of the same assets as Brookfield.  Blacksone also made investments in renewable energy and infrastructure and if they returns are there it will continue to target these industries.

Brookfield must maintain its discipline and not overpay for assets.  It typically seeks complex distressed situations where those assets can be taken over, stabilized and then strategically separated.  This has been a distinct competitive advantage over the years and its ability to maintain this advantage will be critical to future success. 

The Bottom Line

Brookfield has a world of opportunities ahead, but it must carefully navigate past several potentially damaging threats.  I have great confidence in its ability to manage past them.  As it does, shareholders will be greatly rewarded.    

latimerburned owns shares of Brookfield Asset Management. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus