Brookfield: Undervalued Giant In An Overvalued Market!

Brookfield is a rare opportunity in a broadly overvalued market for those looking to deploy capital into foundational positions but are struggling to find opportunities.

There is no shortage of successful people in history, but people whose lives and success inspired the generations beyond them are rare.

Those are the people who create whole new genres in everything you can think of, from politics to business to sports.

You can see their influence everywhere.

Michael Jordan inspired a whole generation of shooting guards characterized by their strong charging to the rim, solid defense, and fade-away plays. An example of them was Kobe Bryant. Look at their games, and you see they are the same.

Maradona inspired a whole generation of left-footed playmakers with low center of gravity, explosive dribbling, vision, and flair. Messi is the pinnacle of this.

Steve Jobs and Bill Gates inspired a generation of visionary builders who dropped out of their colleges and built the largest companies of our age.

This is exactly why Warren Buffett is the greatest investor of all time.

He didn’t just deliver a remarkable performance on paper; he also inspired a whole generation of investors that I call “capital allocators.”

He proved that buying sustainable cash-flow businesses and reallocating distributions can create a long-term shareholder value comparable to buying Apple in its IPO. These are the legendary capital allocators like Mark Leonard of Constellation Software, Tom Gayner of Markel, Prem Watsa of Fairfax, etc.

Among them, Bruce Flatt is one of the most successful and skillful:

Bruce Flatt

He is the CEO of Brookfield Corporation and is known as the Warren Buffett of Canada. He deserves the title. If you invested in Brookfield when he assumed the CEO role back in 2002, you would make 15x of your money. S&P 500 returned 6x in the same period while Berkshire returned 10x.

What’s even more impressive than this performance on paper is how Flatt turned Brookfield into a key strategic player. Brookfield doesn’t own Berkshire-style cash-flow businesses like Dairy Queen and See’s Candies, but it holds major investments in strategic infrastructure projects, renewables, and logistics.

For reference, it owns:

• Two semiconductor plants.

• Renewable energy fleet with over 25GW capacity.

• 306,000 telecom towers, 25,000 km of fiber optic lines, and 32,000 km of railroad.

It has one of the most promising investment portfolios for the next 10 years.

What’s even more impressive is that it still has over $160 billion deployable cash and is aggressively buying back shares, making it even more appealing.

The question is: Should you pull the rigger now? This is what we’ll discover here.

So, let’s cut the intro and dive deep into this exceptional business!

What are you going to read:

1. Understanding The Business

2. Competitive Analysis

3. Investment Thesis

4. Fundamental Analysis

5. Valuation

6. Conclusion

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🏭Understanding the Business

Retail investors, American households, own approximately 58% of the US stock market value, while institutional investors control 42%.

I am saying this to demonstrate one simple fact—retail investors are extremely powerful.

You can see the instances when retail investors explicitly manifested this power in some of the battleground stocks in recent years. Look at Palantir. Retail was very early on that and took the stock from $7 levels in 2023 to $40 levels in 2024, after which institutional investors flocked.

Tesla and RobinHood were perhaps two other examples where retail money took the stocks to highs before institutions doubled down.

The power of retail investors works both ways, though. While a stock popular among retail can skyrocket, stocks that are ignored by retail can remain relatively unpopular despite all their quality.

There are some businesses that have alienated retail investors due to their seeming complexity. As a result, they remain fairly underowned by retail investors, possibly offering attractive opportunities to those who care to look.

Brookfield is one of them.

On a high level, it’s simple—Brookfield is an alternative asset manager.

It invests outside of traditional asset classes such as common stocks, bonds, commodities, metals etc…

Brookfield invests in:

• Infrastructure: Bridges, ports, highways, data centers..

• Renewable energy: Solar plants, wind farms, grid operators…

• Real Estate: Warehouses, office space, multi-family properties..

• Private Equity: All sorts of cash flow businesses.

• Credit: Distressed bonds, venture debt, direct lending etc.

It currently manages over $1 trillion in these 5 strategies:

It operates through three segments:

• Asset Management: Generates revenue through management fees and carried interest on the assets under management.

• Wealth Solutions: It sells insurance products, including annuities, life, and property insurance. It also provides retirement planning and wealth protection services to individuals and institutions. It generates additional revenue by effectively investing its insurance float.

• Operating Businesses: These are the permanent capital vehicles that own and operate businesses in their pre-defined domain and are also the primary vehicles to make commitments to funds managed by Brookfield Asset Management (BAM).

While BAM and Wealth Solutions are standalone entities, the rest of the operating businesses are consolidated into four different entities. In sum, there are 5 different public entities where the parent company, Brookfield Corporation (BN), has varying ownership interests:

It’s all simple until now; it looks like an asset management company operating in the classical conglomerate model.

Where people get confused is the relationship between BAM and other entities that we saw above. Let me explain.

What distinguishes Brookfield from other alternative asset managers is that they are operators. They don’t just take a passive investor seat; they operate the actual businesses they acquire in order to control risk and enhance investment return.

They own and operate assets through these public entities. These public entities are like shell companies that don’t really have a C-suite or any other employees, just boards. Instead, they outsource these functions to BAM.

BAM manages C-suite operations, finds attractive deals, and executes transactions. In exchange, these entities pay fees (a percentage of their market cap) to BAM for these services under a Master Service Agreement.

By separately creating these entities and taking them public, Brookfield enabled them to have permanent capital bases that can commit capital to BAM funds or any other opportunities in their domain.

Their agreements with BAM include a “Right of First Offer (ROFO)” clause according to which, BAM first has to offer deals to those entities when it finds attractive ones. This way, they can deploy capital without the pressure of an exit timeline. This allows them to own higher-quality assets permanently if they want, enhancing long-term shareholder value.

Because they are public, they can issue equity or even pay with stock to fund larger acquisitions without over-leveraging.

This structure allows Brookfield to commit capital directly without incurring extra corporate-level expenses by leveraging BAM’s capabilities instead.

In short, Brookfield is an alternative investment manager that makes money by:

1. Raising capital from limited partners and managing it in funds through BAM.

2. Providing insurance and annuity services through its wealth solutions business.

3. Owning and operating businesses and assets through its operating businesses.

This is a giant operation that works in perfect synergy to manage $1 trillion of assets. The real question is how far it can grow its assets under management to drive business growth and shareholder returns?

Despite its sheer size, I think Brookfield can grow significantly in the next 5-10 years thanks to its competitive advantages and secular tailwinds behind its strategies.

Let’s dig.

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🏰 Competitive Analysis

If there is one single most important thing that determines investment returns, it’s having a sustainable competitive advantage.

The main challenge for investors is that every industry has different dynamics, so what it takes to build a competitive advantage is different. To spot them, you have to understand the industry dynamics.

Think about ASML and Meta.

They are two of the heaviest moat businesses in the world, yet their moats are completely different from each other. ASML’s moat is a combination of technical expertise, know-how, and patents, while Meta’s apps are protected by unmatched network effects.

In asset management, the most important things are fundraising capacity and access to deal flow. Brookfield is one of the global leaders in both.

Its sheer size, combined with decades of track record with outsized returns, enables it to access capital nearly at will. It currently has over 2,000 institutions as investors in its asset management solutions and $550 billion fee-bearing capital under management.

This is unmatched by any other alternative asset manager.

What’s even better is that, over time, it created internal sources of capital, which reduces its dependence on outside capital. This becomes a crucial differentiating factor, especially at times of financial pessimism.

At bad times, institutional investors step back from the markets. This is exactly the time when deals are most attractive. Brookfield can use cash flows from its wealth solution and operating entities to invest in attractive opportunities.

This is a flex that not too many asset management businesses enjoy. Most of the asset management industry shrinks at the time of economic downturns, while Brookfield can keep growing its asset portfolio and finance expansion using internal capital.

This capacity always keeps it in the deal flow. For many of the assets and businesses that fall into its investment strategies, Brookfield is the first natural address.

Its multi-category strategy allows it to find attractive investment opportunities in almost all market conditions.

In good times, governments spend aggressively on infrastructure and transformation projects, creating tailwinds for Brookfield’s infrastructure and renewable power strategies. In bad times, sub-prime corporate debt sells for cents on a dollar, creating attractive opportunities for Brookfield’s distressed debt segment.

There is no other alternative asset manager that can find attractive investment opportunities in all market conditions and is as big as Brookfield.

These factors combined create a perpetual engine driving AUM growth. As its AUM grows, so will distributable earnings and shareholder return.

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📝 Investment Thesis

My Brookfield investment thesis relies on three pillars.

1️⃣ Alternative asset investment is growing fast.

In 2002, only around $2 trillion worth of global assets under management could be classified as alternatives, making up 5% of all AUM. That rapidly grew to $25 trillion today, reaching 15% of global AUM.

PWC now expects that alternative assets will reach $60 trillion by 2032, making up over 20% of global AUM.

There were two major drivers of growth in alternatives:

• Institutional wealth grew exponentially.

• The number of high-net-worth individuals skyrocketed.

In the last twenty years, pension fund assets have more than doubled as the working population boomed. At the beginning of the millennium, 90% of these assets were invested in liquid assets, mainly equities and fixed income.

These funds took a big hit as the US stock market experienced two major crashes between 2000 and 2010—the dotcom crash and the Great Recession. In mind-2009, all major US indices were below their 2000 highs.

Funds saw that their public investments had gone nowhere in 10 years, while their alternative investments had appreciated. This is when they started a foray into alternatives. Since 2009, the share of pension fund assets invested in alternatives has grown from 20% levels to nearly 35% in 2022.

Another major driver was the boom in the number of ultra-high net worth individuals (UHNWI). In the last 20 years, the global economy produced nearly twice as many UHNWIs as it produced in the 55 years following World War II.

To diversify away from the systematic risk of the public equities, they increasingly invested in alternatives through family offices they created.

These two trends aren’t reversing anytime soon.

BSR, a market research firm, projects that pension fund assets will hit $10 trillion by 2030 while the number of UHNWIs will increase by 25%.

As institutional investors and family offices increasingly diversify away from public markets to alternatives to mitigate systematic risk, Brookfield will get the lion’s share as the world’s top alternative asset manager.

2️⃣ Renewables will grow exponentially in the next 30 years.

Renewable energy is one of Brookfield’s main investment themes. Yet, Brookfield’s IRR in renewables has been lower than it is in PE, credit, and real estate. The main reason is that governments across the world kept deploying the green transition.

Yet, as the energy demand skyrockets with growing global infrastructure buildout, countries are now increasingly pressured to generate energy from unlimited sources like wind and solar instead of limited ones like coal and gas.

Brookfield projects that wind and solar will account for 50% of the global energy in 2050.

As the demand switches to renewables, Brookfield will get increasing returns from its investments in renewables.

3️⃣ There is a massive opportunity in infrastructure.

Infrastructure is one of Brookfield’s biggest opportunities for Brookfield going forward.

It already has over $200 in assets under management in infrastructure. Yet, infrastructure build-out will accelerate in the next 30 years, driven by secular tailwinds:

• Transition from fossil fuels to renewables.

• Emerging market investments.

• Digitalization.

Market researches estimate that the global infrastructure investment gap is $15 trillion, and 2/3 of it is in emerging markets.

Digitalization is another big driver of infrastructure investments. McKinsey estimates that the global data center capacity will triple in the next 5 years. Brookfield is massively investing in this category here as it currently has over 350MW in data center capacity.

As the global infrastructure buildout accelerates, driven by green transition and digitalization, Brookfield will see massive opportunities.

In sum, Brookfield benefits from secular tailwinds—increasing demand for alternative investments, green transition, and digitalization.

As the leading alternative asset manager in the world, Brookfield will exploit these tailwinds, growing its fee-bearing capital base and deploying capital profitably in strategies like renewables and infrastructure, where the company excels.

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📊 Fundamental Analysis

➡️ Business Performance

This is one of the parts where it gets a bit complicated for Brookfield because of the fact that it’s a diversified asset manager that operates through different entities.

Brookfield has ownership interests in its operating entities ranging from 11% to 100%. According to accounting standards applicable in the US, Brookfield needs to consolidate the financial statements of entities where it has a controlling interest, even though it’s not a majority interest.

Brookfield controls most of the operating entities through its General Partner position in those entities, even though it doesn’t hold the majority of voting rights.

Thus, Brookfield consolidates wholly owned BPG and all public entities except wealth solutions (BNT), where it owns an 11% equity stake and Oaktree, where it holds a sizeable interest but not the management rights.

Thus, traditional metrics that measure business performance, like revenue, net income, and free cash flow, are largely irrelevant at the parent company level. What you see is the consolidated version, not earnings attributable to the parent.

Looking at Brookfield’s ownership interest in each entity and attributing a portion of their earnings to Brookfield accordingly also doesn’t work because of the way Brookfield operates. Operating entities invest in alternatives that often have a very long useful life. Thus, they capitalize these investments on their balance sheets, taking a major hit in depreciation every year. Yet, these assets don’t actually lose value over time, like real estate. Though earnings take a hit as if they were really depreciating.

What accurately measures Brookfield’s performance is Funds From Operations (FFO), which basically adds up non-cash items to net income. In 2024, Brookfield generated $6.2 billion from operations.

Yet, some of this money doesn’t leave Brookfield entities as they redeploy capital. What Brookfield gets is the actual cash distribution from its businesses. On top of that, it adds distributions from asset management’s direct investments, carry, and fees, and distributions from dispositions to reach Distributable Earnings (DE). This is actually what’s distributable to Brookfield shareholders.

Thus, DE is actually what measures the shareholder value creation for Brookfield, and it performed incredibly well here.

It grew distributable earnings by 50% in the last five years, doubling unrealized DE.

This is an incredible performance by an asset manager at Brookfield’s size. I believe this is going to accelerate as their investments in infrastructure and renewables enter an era of rapid growth driven by increasing global demand.

Overall, Brookfield’s business performance has been rock solid, and there is no reason that it won’t stay this way in the foreseeable future.

➡️ Financial Health

Because of Brookfield’s organizational structure, we should also dissect its balance sheet into parent-level and operating entity-level metrics to really understand its financial position.

This is because operating entities’ balance sheets and asset-level debt are all consolidated in Brookfield’s balance sheet because of its control, despite the fact that these are different entities without and their debt has recourse to the parent. Yet, they are important because they are indicators of operating entity-level financial health, and they need to be strong as Brookfield’s distributions come from them.

At the corporate level, Brookfield’s Debt/Total Capitalization is only 21%.

Its corporate debt includes unsecured bonds, revolving lines of credit, and short-term commercial paper. This is the only debt with recourse to the parent, and it’s well below the parent’s common equity.

Its debt-to-capitalization ratio increases to 47% at the consolidated level. The debt at the operating entity level is composed of the subsidiaries’ own borrowings and property-specific financing.

Subsidiaries’ borrowing is at an average rate of 5.6% and the average term is 8 years, providing an additional layer of safety. And note that this debt has no recourse to the parent.

Beyond corporate and subsidiary level debt, most of the consolidated debt comes from asset financing.

This debt is in the form of property-specific financing, meaning it has recourse only to the underlying asset and has no recourse to either an affiliated Brookfield entity or to the parent.

Brookfield’s capital structure well supports recourse debt. It currently has over $6 billion deployable capital at the corporate level, which increases to nearly $160 billion at the group level.

Against $6 billion deployable capital, it only has $4.8 billion recourse obligations at the corporate level for the next 4-5 years.

In sum, Brookfield has a rock-solid balance sheet that has been conservatively managed.

Its corporate organizations isolate the majority of debt in specific properties without any recourse to the parent and operating entities. At the parent level, its current liquidity is larger than the total recourse for the next 5 years.

As a testament to its rock-solid financials, Fitch recently affirmed its credit rating as A- back in October 2024.

➡️ Capital Allocation

Again, given the corporate structure, traditional capital allocation metrics like ROIC and ROE don’t provide an accurate picture of BN’s capital allocation.

What should we look at now? Let’s get back to the basics.

What’s the best measure of Brookfield’s earning power? Distributable cash.

Where does that cash come from? It comes from operating entities because it has equity interests in them.

When you bring these two together, the answer automatically appears: The best way to measure its capital allocation performance is by measuring how much DE it generated on its common equity in operating entities, which is called cash return on parent equity.

Its cash return on parent equity has been satisfactory since 2021:

This is consistent with the management’s claim that the business has been generating ~15% return on equity for decades.

Going forward, its returns on parent equity may increase incrementally as it aims to aggressively grow DE in the next 10 years, benefiting from secular tailwinds behind its investment strategies.

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📈 Valuation

Valuation is at its best when it’s simple.

Yet, for a simple valuation to also be a credible one, we need three things:

• Profitable business.

• Competitive advantage.

• Opportunities for growth.

When a competitive advantage comes together with ample growth opportunities, it leads to predictable earnings. The business you are looking at is set to grow its earnings as it’ll exploit growth opportunities thanks to its competitive advantages.

In such cases, all you need to do is come up with a conservative growth assumption and attach a reasonable multiple to the forward earnings.

Luckily, Brookfield has all three.

As the largest alternative asset manager in the world, it has competitive advantages in the form of access to capital and deal flow. Its operating businesses with permanent capital also reinforce these advantages as they can own high-quality assets indefinitely, generating a reliable cash flow for the parent.

Thanks to its competitive advantages, it can exploit the secular tailwinds like green transition and digitalization that drive investments into alternative assets.

Thanks to the favorable environment ahead and its business quality, I believe it can grow its distributable earnings by 15% annually for the next 5 years.

This gives us $12.5 billion distributable earnings for FY 2030.

Attaching a conservative 15 times earnings, we will get a $185 billion company.

Discounting this back to now at 8% annual rate, we get a $126 billion company, it’s currently valued at $104 billion.

Meaning, the business is now 18% undervalued.

I don’t know you, but for a business like Brookfield, let alone 18% undervaluation, fair value is extremely attractive to me, especially in a market that is broadly overvalued.

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🏁 Conclusion

Brookfield is one of the best-run businesses in the world, with one of the best capital allocators at the helm.

Its corporate structure has widely alienated retail investors due to hardships in understanding the business, assessing its performance capital structure.

Yet, when you put in a bit of effort, you see that it’s far from impenetrable.

When you understand the structure, spot the right metrics and look at them, you see that its business performance has been robust and its balance sheet is rock solid.

Alternative assets, as a category, are set to benefit from secular tailwinds like the green transition and digitalization, and Brookfield has both capital and expertise to take advantage of them.

Its valuation is also attractive given the quality of business and potential for accelerating growth in the next 5-10 years.

I think it’s an attractive opportunity if you still want to allocate capital but are struggling to find attractive opportunities. You can safely park your money in BN at the current valuation and expect above-average returns for the next 5 years.

This is as good as it gets in the current market.

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That’s all friends!

Thanks for reading Capitalist-Letters!

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👋🏽👋🏽See you in the next issue!