Brookfield Asset Management is setting its sights on mature, stable and cash-generating businesses in the rising rate environment, Cyrus Madon, managing partner and head of the firm’s private equity group, tells affiliate Private Equity International.
“Companies that generate cashflow and pay a dividend will be impacted less by rising interest rates,” he says.
“If you buy a business and hold it for a long time, you’re going to get a good part of your return from cashflows alone – irrespective of where interest rates are. If interest rates go up, you might take some of that cashflow and pay your debt down, so you can readily refinance the debt when it [is] due.”
Businesses that do not generate cashflow are going to have a tougher time in this environment, Madon adds, noting that this is similar to what the firm has seen with special purpose acquisition companies in North America.
Toronto-headquartered Brookfield reported a strong first half, with a record $111 billion of cash and capital available for investment across strategies. It gathered $56 billion of fresh capital from investors and made $20 billion of new investments during the period, the firm revealed on its latest earnings call. In private equity, the firm is set to hold a first close on $8 billion for its sixth flagship vehicle.
Since inception, Brookfield’s flagship private equity funds and opportunistic vehicles have delivered a gross actual internal rate of return of 27 percent as of end-June this year, second-quarter results materials showed. Private equity is its best performing asset class to date. Brookfield grew assets under management to $750 billion by quarter-end, despite an industry slowdown in capital raising.
Commenting on the marked deceleration in transaction activity in the industry, Madon notes that is partly because banks are burdened with loan commitments that they need to get off their balance sheets. Once banks manage this, private markets activity will pick up, he said.
The volume of buyout-backed deals and exits slid in the first half as inflationary pressures started to hit, Bain & Co’s Private Equity Report Midyear 2022 found. The value of buyout-backed exits globally fell 37 percent year-on-year to $338 billion as of end-June. Deal activity, while still robust at $512 billion, could be lower in the second half, Bain noted.
Brookfield is set to capitalize on opportunities if the market enters another turbulent period. Companies in distress – or those no longer able to delay credit problems as they had done during the pandemic – may be appealing prospects, Madon tells PEI.
“We’ve been in an environment for some years now where there’s so much cheap money that debt investors were never really paid to take risk on lower-quality companies compared to great companies,” Madon says. “That is going to change, and it will create opportunities – particularly where companies are overleveraged.”
In fact, if the market does enter another difficult period, it will be an opportunity for Brookfield to invest more. “Our experience shows that’s a great time to put capital to work,” he says.
Aside from Brookfield’s focus sectors of industrials and business services, the firm is also building out its healthcare and technology portfolios. On these latest adjacencies, Madon notes that investments need to be underpinned by the same characteristics – businesses that are “market leaders that generate a lot of cashflow and have an operational improvement angle that we can bring to them.”
He adds: “Over the last five to 10 years, a huge focus of healthcare and technology companies has been on growth and not necessarily cashflow. We like stable and mature businesses that are irreplaceable to their customers – or are very difficult to replace – which we think we can improve.”