Three things to know about Brookfield’s spin-off and dual listing

Brookfield Asset Management is listing a quarter of its alternatives asset management business in a bid to become “asset light” in its largest-ever capital-raising year.

“We expect to have our best fundraising year ever this year. And that is on top of a record past few years,” chief executive Bruce Flatt said during a call accompanying the firm’s first-quarter 2022 earnings on Thursday.

“Our manager split is meant to advance our strength even further. We own a vast and highly diversified group of cash-generative, inflation-protected assets. In the times we are heading [into], this portfolio is what you want to own,” Flatt said.

Brookfield is in market with about 50 funds, including: its flagship private equity fund Brookfield Capital Partners VI, which is seeking $12.5 billion; its third growth equity vehicle, which is targeting $1 billion; and its debut Global Transition Fund, which has a $15 billion target, PEI data shows. It is also raising capital for its infrastructure and real estate funds, it is understood.

The firm revealed during its investor day in September last year that it was on track to hit its $100 billion fundraising target for its current round of flagship funds.

Brookfield will separately list and distribute to shareholders a 25 percent interest in its asset management business, which it expects to complete by the end of 2022. This will be done on a tax-free basis to both Canadian and US shareholders. Brookfield and the manager will both trade on the New York and Toronto stock exchanges, according to a statement.

Commenting on the deal in the statement, Brookfield CFO Nick Goodwin said: “Our asset management business is one of the leading alternative investment firms in the world, managing the capital of over 2,000 global institutional investors and a growing list of high-net-worth investors. We are excited about this next chapter of our growth.”

Here are three things to know about the transaction.

It will become a pure-play alternatives manager

The move will make the Toronto-headquartered investment firm “a pure-play in money management and one of the clear leaders in alternatives”, according to the statement.

This means Brookfield’s approximately $75 billion balance sheet will be free of the substantial proprietary investments of the parent company. Since asset managers do not need much in the way of facilities, equipment or working capital to do business, Brookfield will pay out approximately 90 percent of its annual earnings in dividends, the firm noted in the statement.

Based on the firm’s estimates, the distribution of shares will be around $20 billion or approximately $12 for each share of Brookfield, based on an estimated market value of about $80 billion for the asset management unit.

Flatt first revealed plans to separate its asset management unit with the parent company in a letter to shareholders in February.

The manager split will widen Brookfield’s strengths

Brookfield expects the separation to set the business up for the next 20 years. The split follows nearly three years of the firm’s moves to push deeper into alternatives.

The firm’s $4.7 billion acquisition of Oaktree Capital Management in March 2019 reshaped the private markets mega-firm landscape and highlighted the increasing trend of asset managers becoming one-stop shops for their LPs. In the following two years, it diversified into insurance, secondaries, impact investing and tech.

Flatt noted its actions from the past two years are “starting to pay off, and should be true even more over the next 24 months”.

With the listing, Brookfield is set to more than double the fee-bearing capital of its asset management business in the next five years to more than $800 billion, which will in turn more than double its fee revenues.

“Applying the benefits of our learnings over the past 20 years, we have concluded that to optimise this growth, it is then that there will be a degree of operational separation between the capital and asset manager while still preserving the benefit of their complementary nature and alignment,” Flatt said.

“We continue to see our fundraising accelerating, while some sponsors are having indigestion. The breadth of our franchise and the diversification of capital makes our business very different. In times of consolidation, large brands win and, as a result, we continue to widen our moat.”

There’s no science behind the 25 percent interest

Flatt noted the firm’s intention is for the parent corporation to keep “a very meaningful interest” in the asset manager.

“It may be 75 percent forever. It could be diluted down… or it’s possible over time that it could raise capital by selling shares,” he said. “The intention is to have a significant interest in the asset manager to make sure the interests are aligned.”

He added: “We want to make sure we walk before we run. Twenty-five percent seemed like a good number, especially when our $20 billion float is… probably bigger than most other alternative managers in the marketplace.”

Brookfield has no intention of reducing ownership in the short term, Goodwin said.

Brookfield has $725 billion of assets as of end-March 2022. Fee-bearing capital stood at $379 billion at the end of the first quarter. Dry powder reached $85 billion, which includes $15 billion of cash, financial assets and undrawn lines of credit in BAM and its affiliates, and $70 billion of uncalled fund commitments, according to the statement.