Brookfield Asset Management Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 13 speakers on the call.

Operator

Hello, and welcome to Brookfield Asset Management's Third Quarter 2023 Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference call over to our first speaker, Mr. Jason Fooks, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank Thank you for joining us today for Brookfield Asset Management's earnings call. On the call today, we have Bruce Flatt, our Chief Executive Officer Conor Teske, our President and Bahir Manios, Bruce will start the call today with opening remarks, followed by Connor, who will talk about our private credit platform And finally, Bahir will discuss our financial and operating results for the business. After our formal comments, we'll turn the call over to the operator and take analyst questions. In we'll be happy to take additional questions as time permits. Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing New initiatives and our financial and operating performance, we may make forward looking statements.

Speaker 1

Excluding forward looking statements within the meaning of applicable Canadian and U. S. Securities laws. These statements reflect predictions of future events and trends and do not relate to historic events. They are subject to known and unknown risks and future events results may differ materially from such statements.

Speaker 1

For further information on these risks and their potential impacts on our company, Please see our filings with the securities regulators in Canada and the U. S. And the information available on our website. And with that, I'd like to turn the call over to Bruce.

Speaker 2

Thank you, Jason, and welcome everyone on the call. Our results were Strong in the Q3 and our capital raising momentum is building. Our fee related earnings grew to $565,000,000 And distributor earnings to $568,000,000 each representing a year over year growth of 8%. The resiliency of our results in the current macroeconomic environment demonstrates the quality and diversity of our cash flow streams. This durability stems in large part from the fact that 86% of our capital is long term We're perpetual in nature, driving the overwhelming majority of our fee related earnings.

Speaker 2

Today, essentially all of our distributable earnings come from these highly predictable fee related earnings. Earnings stability is further bolstered by our ability to raise capital from Investors around the world and invested across our 5 diversified businesses that represent essential and growing parts Turning to overall market, central banks have made significant progress In lowering headline inflation, while trying to navigate a soft landing for the economies, market participants Increasingly believe the current rate hiking cycle has crested. And while the move in rates has been historically sharp, The absolute level of interest rate is still relatively low as compared to historic levels and At a level where we have operated and grown successfully for many years and for what we do does not impact the success of our business. On the contrary, the advantages we derive from the broader Brookfield ecosystem allow us to invest When markets are more uncertain, businesses must Differentiate themselves by providing attractive returns and investors like us who have capital put to work and that can underwrite with conviction There has been no shortage of uncertainty and volatility this year, But we have continued to execute. We have committed to over $50,000,000,000 of new investments at very attractive value entry points, We're also being very active on the monetization front, selling some of our de risked and mature assets.

Speaker 2

We currently have over $100,000,000,000 of dry powder from uncalled fund commitments to invest into attractive opportunities Across the business, our fee bearing capital stood at $440,000,000,000 at the end of the quarter and assets under management are now 8 65,000,000,000 This scale partnered with the interconnectivity of our businesses Enables us to spot trends early, source proprietary deal opportunities, underwrite with accuracy, Drive better operations and have best in class access to capital. At the same time, we continue to drive Fundraising. With inflows of $61,000,000,000 year to date, including $26,000,000,000 in the 3rd quarter, which represents our strongest fundraising quarter for the year. This sets us up nicely for what we expect to be a strong next few months We are fortunate that the businesses in which we have a leadership position remain very much in favor with global investors. In fact, our latest flagship infrastructure fund, our infrastructure debt fund and our transition energy fund We are also very pleased that the 6th vintage of our flagship private equity strategy held its final close at 12,000,000,000 making it the largest private equity strategy that we have ever raised.

Speaker 2

At the same time, we are raising significant capital Across a number of private credit funds, seeing strong interest for our flagship real estate fund as opportunities are starting to surface Our strong fundraising success this year should lead to strong revenue growth next year And at the same time, direct cost growth should slow as much of the necessary investments have been made in the platforms we have. The combination of faster revenue growth and slower expense growth should mean next year should be a very strong year for FRE Our ability to succeed at this time in part due to our businesses being positioned around Three global trends that we've talked about before, decarbonization, deglobalization and digitalization It's very important. Decarbonization is at the heart of global initiatives To reach a net zero carbon economy. Of course, this work is taking place within our renewable, power and transition businesses. The decarbonization goes beyond just cleaning our energy sources.

Speaker 2

We're also leveraging our expertise to actively reduce the carbon footprint of virtually every asset that Brookfield owns globally. Notably, some of our most ambitious decarbonization efforts are rooted within our infrastructure and our private equity businesses. Within deglobalization, International supply chains have started to decentralize and are turning to more regional focused operations. We have the global footprint, Expertise, relationships and operational boots on the ground to understand local requirements and meet these logistical challenges wherever they may be. We have capabilities to meet supply chain needs from ports, toll roads, rails, logistical facilities and now with the recent acquisition of Triton, We are also now the largest owner and lessor of intermodal shipping containers to move these goods globally.

Speaker 2

And last, there is a very large need for significant investment in digital infrastructure around the world. Said very simply, this is what is behind your phone. Data is the fastest growing commodity And like any commodity, it needs to be processed, transported and stored. AI is also starting to have a dramatic impact on usage of Data centers and power and is only at its infancy. We are creating end to end capabilities from data tower transmission, fiber and data center storage.

Speaker 2

The need to satisfy these three investment areas will inevitably require many 1,000,000,000,000 of capital investment. This should serve as a tailwind for our businesses for years to come. All of this is alongside the growing opportunity we see in private credit, which Connor will speak to These combined items are what allow us to confidently state our 5 year targets of doubling distributed earnings to $5,000,000,000 And growing our fee bearing capital to over $1,000,000,000,000 Thank you for your continued support and interest in Brookfield Asset Management. With that, I'll turn the call over to Conor.

Speaker 3

Thank you, Bruce, and good morning, everyone. We want to take some time today to spotlight our private credit business and capabilities. While we've talked about our private credit before on both our conference calls and at our Investor Day, We continue to believe that it is an underappreciated part of our story. Today, we have a total of $150,000,000,000 of fee bearing capital in credit funds across all of our businesses. This includes credit strategies within infrastructure, real estate and private equity as well as credit strategies within our Oaktree and LCM platforms.

Speaker 3

Of this figure, dollars 60,000,000,000 represents private credit in long term funds, which excludes any of the liquid high yield bond or credit strategies that Oaktree manages. In pro form a, the AEL transaction, That $60,000,000,000 figure will increase to $140,000,000,000 inclusive of our insurance assets under management. Together, this makes us one of the largest private credit managers today and gives us distinct and meaningful advantages in this space. In the areas of infrastructure, renewable power, transition and real estate, we have a vast footprint and extensive experience and relationships, enabling us to source proprietary deal flow and have better insights when underwriting. In addition, our partnership with Oaktree, the premier name in credit for over 30 years, Investing in our team and platform to ensure that we are well positioned to take advantage of what is a secular change in the role of private credit broadly within the Capital Markets.

Speaker 3

To capture this opportunity to capture the opportunity we see in private credit, We have bolstered our investment capabilities to support increased origination activity. We have expanded our geographic reach to gain local intelligence And we have launched new product strategies. We are seeing the benefits of this in our fundraising figures. Over 40% of the capital we have raised year to date has been from private credit and insurance. And looking ahead, We expect that credit and insurance will be the biggest contributors to our fee bearing capital and our fee revenue growth over the next 5 years.

Speaker 3

In the current environment, RLPs are realizing that they can earn double digit returns investing in credit. In fact, As credit risk return profiles have become more attractive, we've seen traditional fixed income investors increase allocations to private credit And we've even attracted interest from investors that have historically focused on equity investments. Turning to some of our platforms. Within infrastructure and renewable power, the pullback among traditional lenders is happening during a period of unprecedented Capital need to build out renewables, data centers and fiber infrastructure capacity. Last week, We announced the closing of our 3rd infrastructure debt strategy at $6,000,000,000 making it more than twice as large as the predecessor fund and the largest infrastructure debt fund ever raised.

Speaker 3

Few others can operate at the scale, breadth and credibility we can within the broad investment scope of this fund. That means our capital has less competition, enabling us to generate attractive risk premiums while being highly selective and maintaining robust covenant protections. This fund is already 50% deployed As we've seen the cadence for deployment accelerate, given this pace of deployment, we could be in a position to launch the next vintage as soon as next year. Now turning to real estate. Within commercial real estate, Securitization markets remain slow, though issuance has started to pick up in September October.

Speaker 3

Nevertheless, The vast pools of commercial real estate loans that are maturing over the next 12 to 24 months will face a thinner pool of capital available for refinancing. Real estate investors who lack deep relationships with large institutional investors will be looking for solutions. Combined with the broader trends around the availability of traditional lenders, the deficit of liquidity will create a very attractive lending environment For sponsors with significant dry powder like us, we are not the only one we are not only one of the most Real Estate Investors in the world, but we also have one of the longest running private debt platforms in commercial real estate. As we have been providing credit solutions for more than 2 decades, our next CRE mezzanine debt fund, which will be our 7th vintage, should be larger than the 6th, which was $4,000,000,000 But our ability to work at scale far exceeds the size of this fund. This year, we committed to a $1,000,000,000 loan, Sold off the senior mortgage, retained a portion of the mezz and utilized our strong relationships to manage the rest on behalf of co investors.

Speaker 3

This is only the start of where this and our other lending businesses are heading as a one stop shop for credit. And lastly, turning to Oaktree and LCM. Within our corporate lending and opportunistic debt strategies, The magnitude, quality and breadth of deployment opportunities are approaching past periods like those immediately following the GFC In the start of the coronavirus pandemic, we expect this trend to continue as rates remain elevated from where they were. We have raised $23,000,000,000 at Oaktree this year and are seeing strong demand for both the flagship opportunity fund And also their inaugural Lending Partners Fund, which focuses on large scale direct origination. Size matters and the ability to provide sizable capital solutions, particularly where complexity is high, favors investors like us in Oaktree.

Speaker 3

And we continue to see this across a wide set of opportunities. Within private assets, Oaktree's opportunistic pipeline is approximately 8,000,000,000 and the performing pipeline is approximately double that. At the same time, at LCM, Our European Consumer Lending business, our latest $4,000,000,000 flagship credit opportunity fund has earned over 15% returns this year and it should also be a record year for deployment. The team is preparing to launch the next vintage of the fund in the latter half of next year and our initial estimates expected to be meaningfully larger than the current vintage. LCM's specialty finance strategy is also seeing strong demand and the team has plans to launch a number of complementary credit strategies over the next 12 to 18 months.

Speaker 3

We will conclude by saying that we are already one of the largest private credit investors today and we have several powerful engines that will propel and This part of the business over the next 5 to 10 years. The platform we have developed combined with a significant pool of fresh capital to put to work Our significant advantages. Our team has never been broader and our capabilities never bigger. We expect to organically grow our credit platform fee bearing capital by more than $150,000,000,000 to $300,000,000,000 over the next 5 years. In addition, we expect to grow our insurance solutions business by $200,000,000,000 over the same period and we will direct a large part of that capital into private credit funds further expanding our capabilities.

Speaker 3

With that, let us turn it over to Bahir to discuss our financial results.

Speaker 4

Great. Thank you, Conor, and good morning. I'll start off by covering our quarterly financial performance, I'll touch on our continued strong fundraising efforts and then wrap up with some quick remarks on our financial position. Let me first cover off our financial performance in the Q3. We reported fee related Earnings or FRE of $565,000,000 in the quarter or $0.35 per share, which brings our FRE to $2,200,000,000 for the last 12 months, representing growth of 13% over the prior 12 months period.

Speaker 4

Our distributable earnings or DE for the quarter was $568,000,000 or $0.35 per share. This brings our DE also to $2,200,000,000 for the last 12 months and represents a 12% increase over the comparative period Once you exclude the impact of performance fees that were earned in the prior 12 months. Our results in the quarter benefited from capital raising done in the period predominantly coming from our infrastructure, real estate And Private Equity Flagship Funds that contributed $23,000,000 of incremental fee revenues in the quarter And increased fee revenues from our various credit strategies where we're seeing opportunities to put capital to work At increasingly attractive risk adjusted returns. In total, we deployed over $5,000,000,000 of capital during the period Across a number of our credit strategies. Margins for the quarter were solid, coming in at 56%, which was in line with the previous 2 quarters of the year.

Speaker 4

Margins for the 12 months period were also in line with the prior year. Our results in the quarter were impacted by the market volatility that impacted the share prices of our publicly listed affiliates, Brookfield Infrastructure Partners and Brookfield Renewable Partners, both of which traded down in sympathy with the broader infrastructure, Utility and Renewable Power Sectors that traded lower recently in large part due to the perceived effect of interest rates on these securities and some discrete issues impacting certain market participants. While the Brookfield listed entities were not Directly impacted by these issues, their share prices were lower. In order to align our interest with our shareholders, We charge our listed entities a management fee based on their market capitalization. And as such, total fees charged to those entities were lower in the period.

Speaker 4

We have strong conviction about the business prospects of both BIP and BEP. These are exceptional businesses that have very strong underlying business fundamentals, solid balance sheets, Excellent multi decade track records of growing cash flows and dividends and both have attractive and achievable FFO and distribution Growth targets. Both companies gave very strong guidance at their respective Investor Days in September and announced robust earnings this past week. We believe both companies' recent share prices will ultimately rebound as they continue to execute on their business plans. I'll now move on to speak about our fundraising efforts.

Speaker 4

As Bruce noted in his remarks, through the 1st 10 months of the year, we raised a total of $61,000,000,000 of capital, including $26,000,000,000 in the 3rd quarter. Some of the highlights in the period include: Within our infrastructure business, we closed on $3,000,000,000 of capital for our 5th flagship fund, bringing the fund size The more than $27,000,000,000 making this the largest infrastructure drawdown fund ever raised. We anticipate holding the final close for this fund before the End of the year and once all is said and done, we expect to get to our hard cap of $28,000,000,000 Based on the current size of the fund, We have committed or invested over 40% of this fund. Also within our infrastructure business, we held the final close The 3rd vintage of our infrastructure debt fund last week, raising $1,300,000,000 of capital since the beginning of the 3rd quarter And bringing the total capital raised for the strategy to $6,000,000,000 This is the largest infrastructure debt fund ever raised And it's double our previous vintage fund size of $2,700,000,000 Also worth noting here that we've already deployed 50% of the commitments to this fund. In Private Equity, we held the final close for our 6 opportunistic private equity fund of a little over $700,000,000 in September, bringing the total strategy size to $12,000,000,000 This vintage represents the largest private equity fund we've ever raised, which is a testament to our strong track record and long standing investment approach focused on high quality cash generative essential businesses.

Speaker 4

In real estate, we continue to see strong demand for our flagship fund in this current market environment And we close on an additional $2,000,000,000 in the quarter for the strategy. We continue to progress first close commitments and expect to finalize the first close for this vintage during the Q4. Within our credit business, We raised a total of $11,000,000,000 in capital since the beginning of the 3rd period for a number of key credit strategies. Most notably, we raised over $3,000,000,000 for the 12th vintage of our opportunistic credit fund, bringing the size of that fund to over $6,000,000,000 Onto our outlook, I'd like to make a I'd like to provide a few observations. Over the next few months, we expect our momentum on the capital raising front to pick up significantly as we work towards achieving our stated goal of raising close to $150,000,000,000 of capital before we announce our results for the Q4 of the year.

Speaker 4

And heading into 2024, this strong fundraising sets us up for strong earnings in 2024. We also expect our margins to expand and these two items combined sets us up very nicely to deliver an excellent year From an earnings and dividend growth perspective, before I wrap up my remarks, I'd like to make a few comments on our balance sheet. Our balance sheet is debt free and we currently hold close to $3,000,000,000 of net cash and equivalents. This fortress balance sheet is a source of strength for our business. And by using it selectively and effectively, We should be able to drive growth in our asset management activities over and beyond our stated goals.

Speaker 4

We may utilize our balance sheet to launch new fund strategies and business lines or to make a strategic acquisition to bolster our existing capabilities. And in light of our strong financial position, I'm pleased to report that the Board of Directors Has declared a quarterly dividend of $0.32 per share payable on December 29, 2023 Shareholders of record as of the close of business on November 30. That wraps up our prepared remarks for this morning. Thank you for joining the call. And we'll now open it up for questions.

Speaker 4

Operator?

Operator

Thank Our first question comes from the line of Cherilyn Radbourne of TD Cowen. Please proceed with your question.

Speaker 5

Good morning. I was hoping you could start by giving us some color on what you're seeing in terms of consolidation among Excuse me, subscale alternative managers in this environment and whether that's something you continue to monitor with a view to possibly Having an opportunity to round out your capabilities in select areas.

Speaker 3

Hi, Cherilyn. Thank you for the question. You're absolutely right. We continue to see a broad based trend towards consolidation in the alternative asset management And I think it's important to recognize that this is coming from both sides. First, on the client side, Similar to what we've been seeing for years, increasingly clients are concentrating their capital with large Scale reputable managers that can offer them a full suite of products and solutions across the alternative space.

Speaker 3

And no doubt Brookfield Asset Management has been a beneficiary of that as we've broadened our product suite in recent years. But I think it's also important to recognize that the trends towards consolidation are also being driven by the managers themselves. Increasing requirements in compliance and the required level of customer service is much easier to do When you are part of a scale manager that can amortize the cost and requirements of those functions Across a much broader business. Also increasingly for smaller scale managers, having a large depth of talent, A large number of men and women to choose from also helps with succession planning and that's a driver of consolidation in the space as well. So in terms of the trends, we continue to see consolidation amongst the alternative asset managers.

Speaker 3

And To the comment you made in your question, we are actively monitoring a number of situations that similar to what we've said on previous calls, We are going to continue to be very, very selective. We have a great business that has a fantastic organic growth trajectory. And while we are monitoring a number of situations, we will only pull the trigger on ones that are additive to our business, Accretive to our cash flows and really round out our product suite and give us something we don't already have within the business.

Speaker 5

And with respect to insurance, we're looking for an update on how much of BAM Insurance AUM has been committed versus deployed to BAM and Oaktree strategies to date And how you would expect that to evolve and impact FRE over the next 12 months?

Speaker 4

Good morning, Cherilyn. It's Bahir. Maybe I'll take a stab at that one. So of the 28 $1,000,000,000 of assets that we're managing on behalf of Brookfield's insurance business. We've deployed So far about $2,000,000,000 into a number of our private credit strategies.

Speaker 4

A further $7,000,000,000 has been committed and will Probably start being deployed or invested and as such contributing to our results Over the next 24 months and so maybe over the I think your question was over 12 months, so maybe half of that. And if you do the percentages that takes you to 30%, 32% and we've got a Path to get commitments up to our targeted range, which is 35% to 40%, which we're going to do in the next few months or so.

Speaker 5

Thank you for the time.

Operator

Thank you. Our next question comes from the line of Alexander Blostein with Goldman Sachs. Your line is now open.

Speaker 6

Hi, good morning, everybody. Thanks for taking the question as well. I want to maybe start with an outlook of fundraising. 2023 was obviously a very strong year for you guys and it's nice to see reiterating the targets here of, I guess, 150 including AEL. Any thoughts on what 2024 will look like in terms of fundraising once you're through some of these larger flagship funds?

Speaker 3

Certainly. Thanks for the question, Alex. When we think about the remainder of the year And walking into next year, it's a very constructive outlook from a fundraising perspective. We're at $61,000,000,000 year to date. We're going to pick up $55,000,000,000 When we complete the previously announced insurance transactions and that obviously leaves approximately $35,000,000,000 For us to do over the remainder of the year, that compares versus $26,000,000,000 we did in the last quarter.

Speaker 3

And we'd make 2 comments there. 1, it's not unusual for fundraising to be tilted towards the back end of the year. That's pretty common practice for us. And 2, as we move into the back end of the year, we expect to have the first close of our transition fund, Our flagship real estate fund and 2 of Oaktree's flagships are really at the peak of their fundraising. And in addition to that, we get our typical co invest and other complementary strategies as well.

Speaker 3

So, We'll co invest in other complementary strategies as well. So most of the way to that $150,000,000,000 It is very visible through insurance and flagship strategies. And then when we roll into next year, We've often communicated a range a run rate range of $70,000,000,000 to $100,000,000,000 of fundraising every year. And the great news as we roll into 2024 is we expect to not only have the full range of complementary strategies In fundraising, we will also have meaningful closes of those Global Transition Fund, Real Estate Fund and the 2 Oaktree Funds, that will continue fundraising well through the midpoint of next year. So I would say, while it may not be the record year that we had in 2023, the outlook for Fundraising in 2024 is very robust and we expect another extremely strong year.

Speaker 3

Great.

Speaker 6

That's helpful. Thanks. My second question is around insurance and some of the regulatory dynamics coming out of DOL last week. And Appreciate the fact that you guys obviously don't own AEL yet, but maybe just kind of help frame what the proposed rule, if it goes through as Kind of written. What does it mean really for the business?

Speaker 6

Obviously, the annuity sales have been pretty strong for the industry, but Maybe help break down the channels where AAL, but as well as your other insured subsidiary sell through, Just to kind of better give us a sense of any impact on gross sales there. Thanks.

Speaker 3

Certainly. So it's still early days on this, but I think the important thing to recognize is demand continues to grow for fixed index annuity products. That's really what Our insurance business specializes in and this is evidenced through the strong sales growth we've seen both this year and we expect In the coming years, I'd say the proposal is still pretty early in its review process, But the biggest takeaways of it is if passed in its call it written form, we would expect demand and sales Continue to be strong across the platform, but what we would really expect is the new regulatory environment to Increasingly favor large players in the space, which is what we have become. It increasingly will favor those players with the scale and Capital to easily comply with the new regulations while still capturing the significant demand growth. So while we do monitor the situation closely, We feel our business will be well positioned.

Speaker 6

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Geoff Kwan with RBC Capital Markets. Your line is now open.

Speaker 7

Hi, good morning. My first question was just with some of the recent announcements on new funds and partnership with SocGen and Sequoia, Can you talk about what kind of opportunity there is to partner with 3rd party to help create and distribute new strategies?

Speaker 3

Certainly. Thanks, Jeff. As has long been our Probably 2 of our most enduring and most significant competitive advantages is 1, our access to capital And to our operating approach that allows us to be a great partner, to High quality counterparties across different avenues of business. And what's interesting in this past quarter is The partnerships we've announced with both Sequoia Heritage and with SocGen are very, very different. But what they both are illustrative of our situations where we can not only bring our significant capital As a capital provider to address the situation, but there are also situations where both partner brings something unique To create a platform that few others can replicate.

Speaker 3

As I'm sure you can imagine, we're not going to announce any new JVs here on the call today, but I would say we are increasingly seeing other opportunities like this and we're going to continue to be selective And look for situations where it's not just capital that we can bring, but it's also situations where both partners bring something unique And together the platform is better with 2 shareholders than with 1. So I would say that the partnerships we have announced are very indicative of things that we will continue to Contemplate in the future.

Speaker 7

Okay, thanks. And just my second question was back at Investor Day, you talked about using the cash to Make investments in LP commitments to the non flagship non Oaktree funds, help seek new funds, but also invest if any of the affiliates were raising New Equity, I think it was from the letter to shareholders. You talked about doing the BLT investments And ceding new funds, but you didn't reference investing in new equity if the affiliates are raising capital. Is that Still the plan or are you guys not going to be doing that going forward?

Speaker 4

Good morning, Jeff. It's Look, I think what we're trying to highlight or what we tried to highlight in the letter is Just some of the more nearer term initiatives that we have going on. So you'll probably see us be using our cash much more so to do something Strategic, on the acquisitions front, in addition to, standing up new business Lines and new strategy. So that's the focus of the management team For the next little while of how it believes it will put that $3,000,000,000 to work.

Speaker 7

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Sohrab Movahedi with BMO Capital Markets. Your line is now open.

Speaker 8

Okay. Thank you. Two questions. Maybe I'll just stick with Bahir. Bahir, you I mean, I think in the supplemental, you've given us the break Down up to $440,000,000,000 in fee bearing capital between credit, real estate, the various Strategies, you also gave us a sense of how you expect this to kind of grow over the next number of years, I think 5 at the Investor Day.

Speaker 8

Can you give us a similar kind of set of numbers, I suppose, by strategy of where your FRE is coming from Today versus where it would be 5 years from today based on the numbers you put up for us at the Investor Day.

Speaker 4

Good morning, Saurabh. At this point, I think it'll be difficult to do that. We don't break out the FRE For the various business units, for a number of reasons, I could share with you Probably offline. I don't have it on me what maybe the fee revenue Projections will be by business unit and we can go from there. But I don't have that in front of me today.

Speaker 8

I appreciate that. Thank you. I'll follow-up. And then I guess just as a second question, I understand the message around The fundraising and the outlook for it, not just for the back half of this year, but next year as well. Curious as to how important Is return of capital to existing funders as a kind of source of funding future commitments?

Speaker 8

As you think about, for example, 2024 and beyond, I think you have on Page 6 of the supplemental a bit of a flow as The fee bearing capital this year versus this quarter versus last year this quarter. And I think you have inflows, but then you have return of capital and distributions, Which are roughly about half of the inflow. So like is that if you were going to raise $100,000,000,000 Sure. Does it entail returning 50 or thereabouts from existing funds? And so how important is it to actually realize on existing investments?

Speaker 3

Hi, Sohrab. It's Conor here. Obviously, returning capital to our LP partners around the world is a critical component of our business. But I would say that perhaps three things. One, we are very fortunate The vast majority of our clients and partners around the world continue to increase their allocation 2 alternatives, regardless of how much capital is being returned.

Speaker 3

And then we're also very that the areas where we raise the most capital are very much in favor with investors and It is viewed that the opportunity in these vintages of funds should be very, very attractive. The last point to make is the vast majority Our investment strategies aren't overly reliant on leveraged loans or leveraged capital markets in order to execute. And I would say all of that, it's always important to return capital to your clients. That's a big part of what we do. But I would say that all three of those dynamics have somewhat insulated us From some of the broader concerns in the space, but all that being said, we've had a very active period for monetizations thus For year to date and we continue to see that going forward, given that the areas where we are most active, There is still an intense bid for high quality assets.

Speaker 3

So long way to say returning It's important, but I would say our franchise and our diversity of fundraising does somewhat insulate us from some of the headwinds that perhaps you're reading about in the headlines.

Speaker 8

Okay. Thank you for taking my questions. Thank you.

Operator

Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Your line is now open.

Speaker 9

Hey, good morning, everyone. So, we have a follow-up on Alex's question on the 2024 fundraising backdrop. Do you expect to have an InfraSix first close next year? Or you plan to market it next year and probably have a first Close in 2025? And also are there any large insurance wins that are expected at this point in 2024?

Speaker 3

Sure. So Craig, perhaps the way we would answer that is, we are very fortunate that across a number of our flagship Strategies, we are significantly invested. In particular, across the flagship Infrastructure strategy, we're approximately 40% deployed at this point. Where does that look at us in terms of when we'll next be back into the market? That will depend on deployment The remainder of this year and early into next, I think it's probably too early to call what the specific Timing of that will be.

Speaker 3

And then in terms of insurance, the key things we're focused on is obviously our Strong affiliate partner Brookfield Reinsurance is working on closing the 2 large transactions they've announced Argo and AEL. Argo, we are hopeful will close imminently and AEL continues to make great progress and should hopefully get signed up relatively close to the end of the year. Bahir, anything to add?

Speaker 4

Yes, sure, Conor. Maybe I'll just Craig add just a small remark on insurance. Now that we have The platform that we have in that, especially in the U. S. With American National and AEL, In addition to a small business that we have in Canada, a business perhaps that we start in the UK, etcetera, We expect to write just day in, day out or deliver on organic growth of Anywhere between $15,000,000,000 to $20,000,000,000 a year.

Speaker 4

So without doing any large Scale M and A, that could be the level of insurance, assets that we get under management each year just Now that we have the platform that we have today.

Speaker 9

Great. Thanks, Bahir. Just as my follow-up on M and A, 2 kind of 2 part question here. When did you change your strategy in terms of using BAM Capital for M and A versus another source like BAM. And the second point of that is I heard you reference $3,000,000,000 of cash.

Speaker 9

I think if you look at your press release, Page 5, dollars 3,000,000,000 is exactly what you have. So I'm just wondering what's the level of base capital Do you have to leave the company at all times for working and regulatory capital needs inside of F3?

Speaker 3

Sure, Craig. So I would say one of the motivations around the spin out almost a year ago now Was to give Brookfield Asset Management a best in class currency to facilitate M and A when it was attractive to do so. And looking back With the benefit of hindsight almost 12 months later, the spin out of the manager into its own segregated entity Has been great in terms of seeing opportunities and monitoring opportunities to pursue inorganic growth for the business. And I would say we've been relatively active in pursuing and monitoring those opportunities, but being selective at the same time. And then in terms of just the capital and the capital available for growth, we obviously are a highly cash generative business.

Speaker 3

And therefore, we do have that capital on our balance sheet to grow our business either Through seeding new strategies that we intend to grow ourselves or through strategic M and A, but the reality of it is our business is self funding. So I would say that the entirety of that $3,000,000,000 of capital is available to us, plus more, given the debt capacity within the business, Should the right opportunity come along.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Your line is now open.

Speaker 10

Great. Thanks. Good morning, folks. Thanks for taking my questions. Maybe the first one on Global Transition II.

Speaker 10

I think in the shareholder letter, you said you've already got, I think it's $1,500,000,000 committed to deploy in that fund, if you could correct me if that's correct. And just but broader but more broadly speaking,

Speaker 3

how do you

Speaker 10

think about the deployment Opportunities for transition versus say infrastructure, which is probably your 2nd most rapid Deployable large scale flagship fund just over the long term and then the investor base that is Allocating to transition, do you see that growing significantly in terms of the percentage allocation from LPs Dedicating specifically to transition over the long term.

Speaker 3

Yes, certainly. So a bit to unpack there. 1st and foremost, yes, you are correct. The 2nd vintage of our transition fund has announced Two transactions that will act as the first two investments in the seed portfolio for BGTF2 And those transactions do total about $1,500,000,000 So all of that correct as you stated. In terms of the environment for transition investing, and I'll say equivalently the environment Infrastructure investing, it is very, very robust.

Speaker 3

Right now, you are seeing One of the greatest capital needs in memory to build out data centers, to build out renewable power And quite frankly, that is happening at a time where capital is becoming increasingly scarce For us both on the infrastructure side and on the transition side to be not only a capital provider, but an operating partner to those businesses. And I would say, on behalf of both our infrastructure and our transition platforms, the market opportunity set Today is larger today than it's ever been before, while at the same time probably being as attractive as it's been in recent memory. And then lastly, to your last point, just around the investor base, as we begin to think about BGTF2, It's significantly larger this time. And I would say there's really two things that have changed versus our first vintage, which we launched in 2021. I know 2021 is not that long ago, But the world has moved very, very quickly.

Speaker 3

And since 2021, many more institutional investors around the world Either have carved out a decarbonization or transition investing bucket or at least at a minimum Firmly decided where that investment strategy sits within their portfolio. And therefore, they are much more willing and able to allocate capital Opportunity set for these investments has significantly grown and all investors regardless of their decarbonization objectives Are simply seeing one of the largest investable universes at very attractive risk adjusted returns and that's driving enhanced Capital flows into the space versus what we saw 2 or 3 years ago. So I would say on the transition side, not only is the Investor spectrum widening, is growing, in terms of size of commitment as well.

Speaker 10

That's super helpful. And then just a follow-up, maybe if you can give us an update on democratized products, retail focused Products, we've obviously talked a lot about flagships and the very strong fundraising momentum there. But as you think about 2024 and developing these products, I guess just maybe sort of your thought on the timeline given the lag We have getting them on platforms and also, maybe some perspective on the risk appetite right now from the retail perspective.

Speaker 3

Certainly. So I would say in terms of growing our retail presence, we've spoken about this In the past, we do think it is a significant opportunity for us, but one that we are going to Grow and tackle in a very prudent manner. And today, we have a number of products targeted More at high net worth or retail investors. And while those are modest in terms of the scale of our business today, They are growing very rapidly. Our Bose franchise, Brookfield Oaktree Wealth Solutions Continues to expand meaningfully.

Speaker 3

And the other one that we would highlight, just drawing on the broader strength we've seen across infrastructure investing Our BII Brookfield Infrastructure Income Fund platform has seen significant growth Throughout this year and continues to get loaded on new platforms in different regions around the world. So we would expect that to continue to accelerate and probably really hit its stride in 2024.

Speaker 10

Great. Thank you so much.

Operator

Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Your line is now open.

Speaker 1

Hi, still good morning. Thanks for taking the question. In the letter this quarter, you commented that peaking interest rates bode well for transaction activity. Are there geographies or asset classes that you expect more robust activity levels as we look to 2024? And I assume that this means a better investing environment, but are there also parts of your business where you see where you expect to see better realization opportunities as well?

Speaker 3

Thanks, Ken. Apologies for being redundant, but a position that we've had for, I think, a number of quarters now is Interest rates are higher than they've been in the past, but they are not exceptionally high by historical standards. They're very much in a range that is very constructive for our business, both for Deployment through M and A, development of new assets and through for monetization activity. But what we really needed in order to facilitate a more constructive transaction environment We needed rates to stop going up. And that is certainly what's happening around the world today.

Speaker 3

As Bruce mentioned in his opening remarks, Interest rates do seem to have crested. Governments around the world have done a great job In terms of taking the hard measures in order to get inflation under control. And therefore, we do see a much more Structive environment for transactions going forward. In terms of where we're going to see that transaction activity, I would say it's very broad based. This interest rate environment is incredibly constructive for, I would say, our infrastructure renewables and Our infrastructure, renewables and transition platforms, but the three other points I would make is the interest rates are elevated to where they have been in the past.

Speaker 3

And that means there is going to be an incredible opportunity for our credit products to refinance the wall of maturities that are coming. Secondly, with the plateauing of interest rates, we expect the liquidity to return to the real estate market, both in terms of new investments At what is going to be very attractive value entry points as well as creating the opportunity for monetization activity of best in class assets. And then lastly, as markets continue to strengthen, we are going to see increasing liquidity in The leveraged loan market, which should facilitate more transaction activity in our private equity platform. So I would broadly put it in those buckets. Renewables and infrastructure, they work across all interest rates environments.

Speaker 3

We're going to see a tremendous And as the leverage loan market recovers, it's going to be a great opportunity for our private equity business.

Speaker 1

Great. Thank you there. And in the prepared remarks, you commented that 2024 would be an excellent year for dividend growth. I think with the spin out of BAM, the goal was to distribute the majority of the cash flows. How are you approaching the right dividend level for next year?

Speaker 4

Hi, it's Bahir. I'll take a stab at that one. So look, our Stated target, when we spun off the company is to return 90% plus Of the total distributable earnings that we generate in the business back to our owners, Predominantly through dividends, but also through stock buybacks. Look, we've gone through the momentum that we have on the fundraising side With the path to getting somewhere close to $150,000,000,000 I would note 80% of that It's capital where we make fees on committed capital versus on deployment. So with a lot of visibility on that, In addition to the remarks I made earlier around margins and having that expand Going into next year, we believe that 2024 could be a step change year with respect to Growth from an FRE and distributable earnings perspective.

Speaker 4

And so based on that and You can deduce that the dividend growth for next year could be quite sizable, but And we'll get that all approved at our February Board meeting and announce it with our February results.

Speaker 1

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Nik Prave with CIBC World Markets, your line is now open.

Speaker 11

Okay, thanks. Maybe as a follow on to that last response On operating leverage, you've been essentially holding the line on expenses for a few quarters now. How would you guide us to think about expense growth looking out into 2024? I'm just trying to size the magnitude of the margin expansion opportunity with some of these chunkier fund closings starting to accrue fees toward the end of this year.

Speaker 4

Good morning, Nick. It's Bahir again. So I think our Expenses year to date are up somewhere I think around 13% to 14% And because our fundraising this year was more as you know more back end loaded, Our revenues our revenue increase has been much smaller than that. I think 2024 is going to be the exact Flip, 1st, while I don't have a certain percentage to guide you to, I can we feel pretty good that our growth in expenses next year Should be much lower than what it was in 2023, now that a lot of the material investment on the Peoples side It's already behind us and as I highlighted at our Investor Day back in September. So the expense growth is going to be Much lower.

Speaker 4

A lot of the fundraising would have been done already. So you're going to have that Revenue growth pick up with a much slower expense growth. And So there should be the impact on operating leverage next year could be quite sizable.

Speaker 11

Okay. Fair enough. And then just in light of some of the comments on the private credit franchise, I just wanted to get your thoughts on how the product lineup might evolve over time To accommodate a step change in the scale of the insurance business, do you see potential for inorganic growth as a means to further broaden out that suite of capabilities? Just wondering if there are any obvious gaps in the product lineup that you might look to address in private credit specifically?

Speaker 3

Certainly. So I would make two comments there. Today, our partners at Oaktree are the premier credit franchise around the world. And while they are have a 30 year history in opportunistic credit, they have a multi decade history in other forms of credit, notably Performing credit, loans, other strategies as well. And perhaps what's most understated in that long history is their ability to develop and build new strategies when the market opportunity presents itself.

Speaker 3

So similar to us, if there is an opportunity where we can acquire a capability and it makes More sense to buy versus build. We will work with our partners at Oaktree and consider that. But I would say similar to what we see in our infrastructure or real estate franchises, when you have such a capable franchise as Oaktree, Many times it's easier to build those capabilities organically. But both options do remain open to us. And given the broadening of the credit space and the different products that are available, different forms of asset led, Asset backed lending, other forms of credit products, we will continue to look to broaden our product set, But we would expect the majority of that growth to be organic.

Speaker 11

Okay. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Mario Saric with Scotiabank. Your line is now open.

Speaker 12

Hi, good afternoon. And 2 really quick ones for me, more of a clarification on both. Just coming back to Saurabh's question On Private Fund Distributions, is there a kind of quantum range of expectations for 2024 that you're comfortable providing, Taking into consideration the underlying market liquidity that you think will support the forecast deployment initiatives that you have? Or is it hard to say what that may be at this point of stage?

Speaker 4

Go ahead, Connor.

Speaker 3

I would say it's probably I'd perhaps answer that question 2 ways. It's probably hard to forecast exactly how much We expect to sell next year, but I would perhaps draw a slightly different conclusion. That is to say that I would say that we feel very confident about our fundraising projections, Regardless of if we hit the high end or the low end of our expected monetization range, Trying to put a pin in exactly how much capital we will return, that's probably unrealistic at this point. But I would say we're comfortable returning a level of capital that will ensure that we're well positioned to deliver on Both our fundraising and our deployment targets next year.

Speaker 12

Okay. And then my second one, and And I appreciate, Connor, you mentioned it might be a little bit too early to talk about BIIF6. As you mentioned, BIIF5 is already 40% committed. I know that historically, you'll look to start fundraising for a successor fund once I think you've put the 70% to 75% kind of deployed committed area, which If the thoughts on peak interest rates and transaction activity accelerating materialize, I guess we wouldn't be too far off of that level presumably by the end of You're kind of early to mid-twenty 5. So is that a very simplistic way of thinking of it?

Speaker 12

So when you hit 70%, 75%, you would push forward with The next one, pending client demand or do you like to see a specific amount of time elapsed between the funds. So for example, if I look at Slide 30 of the supplemental on the core plus infra side, the vintage years are about 3 years, it's Spread all the parts. So is it more of a time thing or is it simply hitting 70% to 75% if there's client demand you'll start the next phase?

Speaker 3

Mario, your approach is not far off. I would say We take great pride in ensuring we do our jobs well and deploy the capital prudently, but take advantage Deploy the capital prudently, but capitalize on the opportunities that are available In the market during the investment period of a fund. So we do not get overly fussed if a fund comes back to market A little quicker because there were great opportunities to deploy the capital or similarly, we don't get too fussed If a fund comes back to market slightly slower, because there weren't great opportunities to deploy the capital. So it is Much more predicated on the deployment levels in the previous vintage. The only thing I would say is, is your rough Thresholds are bang on.

Speaker 3

They're very accurate, but they are not absolute guidelines. We take into account how much Capital has been deployed as well as what is the ongoing pipeline for those funds, such that We're only raising capital that can for the next vintage that can be readily deployed for those clients and those partners quickly after they've committed it. So your metrics are right, your thinking is being on. The only thing I would add is We also take into account the pipeline of investments as well as in terms of deciding when to go with the next vintage.

Speaker 12

Okay. Thank you for the color.

Operator

Thank you. This concludes the question and answer session. I'd now like to turn the call over to Jason Fuchs

Speaker 1

Okay, great. We appreciate all of the interest. And if you should have any additional questions on today's release, please feel free to contact me directly.

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Key Takeaways

  • Strong Q3 Financial Performance: Fee related earnings increased 8% year-over-year to $565 million, and distributable earnings rose 8% to $568 million, reflecting diversified and resilient cash flow streams.
  • Robust Fundraising Momentum: Brookfield raised $61 billion year-to-date, including a record $26 billion in Q3, driven by flagship infrastructure, private equity and credit funds, and closed its largest ever private equity fund at $12 billion.
  • Scaling Private Credit Platform: Brookfield has $150 billion in credit funds—$60 billion in long-term private credit slated to grow to $140 billion pro forma AEL—with Oaktree and LCM partnerships fueling anticipated credit and insurance fund growth.
  • Significant Investment Firepower: The firm committed over $50 billion to new investments this year at attractive entry points, holds over $100 billion of dry powder, and oversees $440 billion in fee bearing capital and $865 billion in assets under management.
  • Long-Term Strategic Themes: Brookfield is targeting decarbonization, deglobalization and digitalization tailwinds, with goals to exceed $1 trillion in fee bearing capital and $5 billion in annual distributable earnings within five years.
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Earnings Conference Call
Brookfield Asset Management Q3 2023
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