Brookfield Asset Management Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 13 speakers on the call.

Operator

Hello, and welcome to Brookfield Asset Management's 4th Quarter 2023 Conference Call and Webcast. At this time, all participants are in listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the conference over to our first speaker, Mr. Jason Fooks, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

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, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Conor, who will talk about our growing fundraising capabilities. 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 any analyst questions.

Speaker 1

In order to accommodate all those one asked questions, we ask that you refrain from asking more than 2 questions at one time. And if you guys should have additional questions, please rejoin the queue. Will be happy to take additional questions at the end if time permits. Before we begin, I'd like to remind you that in today's comments, including responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward looking statements, including forward looking statements within the meaning of applicable Canadian and U. S.

Speaker 1

Securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, future events and results may differ materially from such statements. 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.

Speaker 1

And the information available on our website. And with that, I'll turn the call over to Bruce.

Speaker 2

Thank you, Jason, and welcome to everyone on the call. Our results were strong in the 4th quarter, our best quarter in an overall excellent 1st year for Brookfield Asset Management. In total, we raised $140,000,000,000 of capital, which includes $93,000,000,000 raised over the past year $50,000,000,000 coming from the pending close of the AEL insurance account with Brookfield Reinsurance. We were successful fundraising across our flagship funds, including new records for our infrastructure and private equity franchises. This past year, we fundraised across a broad set of complementary strategies and with an increasingly diversified set of global investors.

Speaker 2

We also launched a number of new funds, most notably Oaktree's Lending Partners Fund, which shows promise in evolving to be a 6 flagship series for us. Our goal is to always have a focus on providing exceptional value to our clients. Our goal has always been to generate strong risk adjusted returns by acquiring assets for value, leveraging our operational capabilities to grow cash flows and compounding capital over the long term. By staying ahead of market trends and continuously innovating, we've been able to help our clients achieve their investment objectives in ways that truly matter to them. At the same time, this past year has been about making the necessary investments in our platform to position us for long term success and growth.

Speaker 2

We've been expanding our global fundraising organization as well as building our capabilities with an insurance and private wealth, with the expectation that they will grow to become meaningful contributors to our annual fundraising in the near term. Fee related earnings grew 6% to $2,200,000,000 and the distributable earnings grew 7% also to 2 point $2,000,000,000 The significant capital we raised over the past year sets us up for strong growth in 2024 And with much of the investment in our platform complete, our cost growth should moderate. The combination of faster revenue growth and slower cost growth should mean a strong year for FRE and DE growth. More broadly, it appears that inflation has tempered, Interest rates have peaked and the Fed soon will begin easing rates. Markets struggle in the face of uncertainty and these actions signal improved stability resulting in increased investor confidence in pricing risk and therefore enhanced liquidity to capital markets.

Speaker 2

Transaction volume should pick up as well, which will enable more managers, including us, to monetize investments, return capital to partners and in turn enable those partners to reinvest in private funds for what should be an excellent environment for investing. We are going into this year with more than $100,000,000,000 of dry powder across our businesses despite investing over $50,000,000,000 last year, one of our most active years of investing. We believe the environment will lead to continued consolidation in the industry. This is a theme you've heard us talk about a lot before. We participated in this consolidation 5 years ago with our Oaktree partnership and we continue to look at ship and we continue to look at strategic opportunities to further broaden and strengthen our franchise.

Speaker 2

This tend towards consolidation is especially true for areas of the alternative asset management space that are most in favor by investors and should attract more capital. Infrastructure, renewable power and energy transition are expected to be among the fastest growing alternative asset sectors for very good reason. Investors continue to allocate to the space because these are assets that can deliver 4 things all investors see: market growth, principal safety in uncertain times, inflation protected cash flows and long term capital appreciation. We were an early mover into these areas after we identified that decarbonization, deglobalization and digitalization were megatrends that were shaping the global economy. Governments, corporates and other stakeholders have made commitments to net 0 targets and are grappling with energy, security, supply chain resiliency and meeting the exponentially growing demand for data.

Speaker 2

These challenges will require trillions of capital investment and our infrastructure, renewable power and energy transition businesses are well positioned to deliver solutions. Today, we manage nearly $300,000,000,000 of assets across these businesses making us the largest and most experienced in the space. We've used this first mover advantage to build critical expertise, deep relationships and we use our scale and source proprietary deals to pursue investment opportunities that are either too large or too difficult for most investors to execute. We believe that our scale, diversity, reputation and strong track record distinguish us in these areas and we continue to invest in our franchise and strengthen our brand. And we believe we'll come out of this period of consolidation even more dominant than we entered.

Speaker 2

With that overview, let me turn it over to Conor to speak about the capabilities and strategy of our fundraising platform.

Speaker 3

Thank you, Bruce. Next, we will speak to our operations and how we have scaled our business, expanded the breadth of our product offerings and enhanced our capabilities across capital raising channels. Today, Our diversity across asset classes, product strategies and fundraising sources enables us to raise and This past year is a good example of how our partnership approach and investment track record have allowed us to raise larger flagship funds and deliver on our ambitious capital raising targets. At the same time, we have been expanding and diversifying our suite of complementary funds. Today, we have over 100 active funds across our business They cover a wide range of asset classes, products and strategies, many of which we are fundraising for at any given time.

Speaker 3

In addition, we've also been building out our fundraising capabilities across an increasing number of channels. The result is that we can expect to raise approximately $75,000,000,000 annually separate and apart from our flagship funds, which are typically raised every few years. That should allow us to annually raise $90,000,000,000 to $100,000,000,000 on average at this point in time. Let us break down that figure a little bit. While most of our fundraising will continue to be driven by our institutional sales team and by our public affiliates, we are continuing to grow other channels to augment and diversify our fundraising.

Speaker 3

A good example of this is the growth of our insurance solutions channel. As Bruce mentioned, We expect Bien Re's acquisition of AEL to close shortly, which will bring our fee bearing insurance capital up to more than $80,000,000,000 from approximately $35,000,000,000 today. At the same time, Brookfield Reinsurance will become one of the largest writers of annuities in the United States. And by employing the same operational enhancements Utilized following the acquisition of American National a few years ago, we expect to meaningfully grow AEL's pace of annuity underwriting. And over time, we should be able to organically raise $15,000,000,000 to $20,000,000,000 of insurance capital annually.

Speaker 3

And that would be independent of any additional insurance acquisitions that B and Re may do. We have also been building Brookfield Oaktree Wealth Solutions or BOSE, which is our private wealth business. We have approximately 150 dedicated employees across 10 countries to meet the growing needs for alternative assets in the private wealth market. We have partnered with more than 50 wealth groups worldwide in delivering institutional quality investment strategies to their clients. We currently have 5 perpetual strategies specifically developed for private wealth investors across credit, Real Estate and more recently Infrastructure.

Speaker 3

At the beginning of last year, we launched the Brookfield Infrastructure Income Fund to investors in Asia Pacific and Europe and recently we launched the strategy in the United States. The strategy has been very well received and we've raised almost $2,000,000,000 over the past year. In total, We've raised approximately $7,000,000,000 of capital through our private wealth channel last year and over time we expect this channel to grow to $12,000,000,000 to $15,000,000,000 of fundraising annually. Switching gears now to product development. Core to our success has been our adaptability to the ever changing market environment and our focus on adding new products and solutions for our clients.

Speaker 3

The majority of our new products come organically from in house product development. Our product development function works across our businesses and investor segments to leverage our investment expertise and global presence to develop new solutions to meet our clients' investment objectives. This serves as an important competitive advantage, allowing us to differentiate our platform from our competitors. It enhances our relationships with clients because we can create tailored strategies to meet their needs and proactively adjust to ever changing market conditions. As a result, we expect the role of new product development to be an even bigger driver of our business going forward.

Speaker 3

Some of the new products and strategies we've recently announced include a €10,000,000,000 private investment grade debt fund with the purpose of originating and distributing high quality private credit investments. This initial fund will launch with €2,500,000,000 of seed funding in part from Brookfield Reinsurance. Another example is a joint venture with Sequoia Heritage called Pine Grove, which will focus on acquiring secondary funds in the venture capital and technology sectors. Pine Grove is raising an inaugural fund in the first half 2024 with $500,000,000 in seed capital collectively from Brookfield and Sequoia. We also continue to leverage our deep relationships with investors in the Middle East and are launching a Middle East Private Equity Fund this year as well.

Speaker 3

This region continues to be one of the fastest growing in the world and we have established ourselves as the best positioned sponsor in the market. Also with our private equity franchise, we'll be launching a newly formed financial infrastructure platform. This strategy focuses on opportunities in digital payments and services, a key pillar in the digitalization of the global economy over the coming years. Lastly, we also recently announced the launch of our multibillion dollar catalytic transition fund, CTS in partnership with UAE's Ultera. Ultera committed $1,000,000,000 of seed capital into this fund, which will have a differentiated and focused mandate on raising and deploying capital exclusively in emerging and developing markets with a focus on energy transition, industrial decarbonization, sustainable living and climate technologies.

Speaker 3

In addition to product development, at the same time, We always seek to strategically and selectively invest in and partner with managers that have capabilities that are complementary to our platform. We do so when investing can be done accretively and when building a product organically would take too long. This can be done at scale like we did with Oaktree in credit. And over the past 5 years, we've partnered in many ways, including building our private wealth business, scaling our insurance business and sharing valuable insights across our portfolios. However, We also selectively make smaller tactical investments in managers that we believe can help scale and are complementary to our business.

Speaker 3

One example of the latter approach is our 50% interest in LCM, a European based private credit alternative asset manager. Since we began our partnership with the firm, LCM has tripled the size of their main fund in addition to growing across their platform. We think there is an opportunity to do more of these tactical acquisitions. These will be managers that can be assisted by the overall scale of our business and capital and managers whose growth can be accelerated when brought into the Brookfield ecosystem. Most will benefit from our insurance assets under management and from our client relationships.

Speaker 3

In addition, we can provide these managers with the proprietary data insights that we gather from our more than $900,000,000,000 of assets under management. In order to manage our growing private credit capabilities across Brookfield, notably Oaktree, LCM, our SocGen partnership and our insurance investment strategies, we recently placed all of our credit strategies under a new credit group, which is led by Craig Noble. Craig is a Brookfield veteran. He's been with us for approximately 20 years and was most recently responsible for our institutional and wealth fundraising. Prior bringing all of our credit strategies together with our newly formed credit group allows us to work effectively across our credit teams, provide excellent returns and maximize our ability to create value for our clients.

Speaker 3

We are confident that credit will be a meaningful driver of BAM's growth over the next decade, given the industry tailwinds and our collective focus. This adjustment will help us achieve that. We will now turn the call over to Bahir to go through our financial and operating results for the quarter.

Speaker 4

Thank you, Conor, and good morning, everyone. So for this morning's call, I'll focus my remarks on 3 areas, starting with a discussion of our financial results, for 2023. I'll then do a bit of a recap on our capital raising efforts for the year and then conclude by touching on the outlook for 2024. So first just on financial results. Fee related earnings or FRE for 2023 were $2,200,000,000 6% from the prior year.

Speaker 4

This increase was primarily the result of capital raise for the various flagship funds, which we raised during the year, including our 5th infrastructure fund and 6th private equity fund as well as capital that we deployed within our various credit and complementary funds where we earned fees on invested capital. These increases were somewhat offset by lower catch up fees and transaction fees, lower fees associated with our permanent capital vehicles and increased costs as we scaled up the business considerably in 2023. Distributable earnings for the year were also 2,200,000,000 up 7% compared to 2022. This increase was primarily attributable to the increase that we had in our FRE. We ended 2023 with $916,000,000,000 of AUM or assets under management, up $126,000,000,000 or 16 percent from the end of 2022.

Speaker 4

Our fee bearing capital currently sits at $457,000,000,000 up $39,000,000,000 and 9% compared to the prior year and will increase to over $500,000,000,000 with the shortly anticipated AEL deal. Our fee bearing capital benefited from strong inflows as well as capital deployed during the year in addition to higher valuations on our permanent capital vehicles. This was somewhat offset by capital that we returned to our clients during the year. Also during the year, we deployed $58,000,000,000 of capital in investments, recorded over $30,000,000,000 of monetization across the business and ended the year with $107,000,000,000 of uncalled fund commitments. Now turning to fundraising and as Bruce noted in his remarks, we had inflows of $93,000,000,000 over the past year, which will soon be over $140,000,000,000 once the AEL transaction closes and we get the approximately $50,000,000,000 of assets that come with this transaction that we will be managing.

Speaker 4

The $93,000,000,000 of inflows were spread across approximately 50 strategies as well as $13,000,000,000 of inflows coming from Brookfield's reinsurance business. We've held several large fund closes since our last earnings announcement, raising $33,000,000,000 of capital. The most significant fundraising updates and deal activity since the beginning of Q4 include: 1st, within our infrastructure business, where we have 2 updates. In December, we held the final close for the 5th vintage of our flagship global infrastructure fund, bringing the total strategy size to $30,000,000,000 With approximately 200 investors committed to the fund, This 5th vintage is 40% larger than the predecessor fund. We are now approximately 40% deployed across 6 large scale assets and the momentum on the capital deployment front is very strong.

Speaker 4

2nd, we held a final close for our infrastructure debt fund for a total strategy size of over $6,000,000,000 Over 60% of the investors in this fund are new to the strategy, showcasing Brookfield's leadership position in the infrastructure debt space. Within our renewable power and transition business, We recently finalized the first close for the 2nd vintage of our flagship global transition strategy at $10,000,000,000 In the Q4 alone, we raised over $6,000,000,000 including an aggregate $3,000,000,000 commitment to our transition strategies received from Ultera. In real estate, we are completing the first close for the 5th vintage of our flagship real estate opportunistic fund strategy at $8,000,000,000 and expect the final close later in 2024. In our credit business, Oaktree raised $30,000,000,000 across its franchise in 2023, including almost $10,000,000,000 in the 4th quarter. The 12th vintage of our opportunistic credit fund raised $2,000,000,000 in the 4th quarter and our strategic lending partners fund raised $1,000,000,000 bringing the fund sizes to $8,000,000,000 $4,000,000,000 respectively at year end.

Speaker 4

Oaktree has a robust pipeline for additional private credit fundraising and we expect to complete the fundraise for these funds later in 2024. Now turning now towards our outlook for 2024 and as Conor highlighted, should be another very strong year on the fundraising front as we have 4 flagship funds that are still in the market and approximately 50 strategies that we have either started to raise money for or expect to launch in the very near future. This should mean that we're in a good position to raise another $90,000,000,000 to $100,000,000,000 of capital in 2024 and this excludes the AEL acquisition as well as any of the capital that we raised as part of our 2023 plans that slipped into January of this year. We also have over $100,000,000,000 of dry powder available for deployment in what we expect should be a very attractive environment for investing. All of this should drive significant growth in our fee revenues in 2024.

Speaker 4

At the same time, as previously mentioned, we worked hard in 2023 to build much of our investment teams and infrastructure for all these new fund strategies that Conor touched on. Much of that investment is now complete, so we expect our expense growth to moderate in 2024, resulting in a sizable improvement to our margins across the business. So with all that said and as we highlighted during our call last quarter, we expect to generate outsized growth in our fee related earnings in 2024. And so with that as a backdrop, in addition to our balance sheet, which has close to $2,700,000,000 of cash and equivalents and no debt, I'm pleased to report that the Board of Directors has declared a dividend of $0.38 per share for the Q1 of 2024, payable on March 28 to the shareholders of record as of the close of business on February 29. This dividend increase represents a 19% Annual growth rate, which is at the high end of our 15% to 20% target range for dividend annual dividend growth that we set out when we formed the company a year ago.

Speaker 4

This dividend reaffirms our conviction around our outlook for earnings growth for the next year and beyond. And so with that, that wraps up our collective prepared remarks for this morning. Thank you for joining the call and we'll now open it up for any questions. Operator?

Operator

Thank Our first question will come from the line of Brian Bedell with Deutsche Bank.

Speaker 5

Great. Thanks. Good morning. Thanks for taking my questions. Guy, just to clarify on the fundraising outlook For 24,000,000 and I appreciate all the comments on the detail.

Speaker 5

I count about $110,000,000,000 potentially with another $35,000,000,000 to go with the flagship. So, just wanted to see if that seemed correct. And as the $10,000,000,000 transition, first closes that all in calendar 2024 or was some of that in the 4th quarter?

Speaker 3

Good morning, Brian. Thanks for the question. I'll maybe take that in 2 parts. The first maybe to answer your second question there. What happened at the end of 20 23 is we completed our fundraising, but almost entirely to service some of our largest LP partners around the world.

Speaker 3

They essentially committed to a number of our funds in 2023, but they needed to utilize 2024 allocations. So we did the fundraising work in 20 3 and we closed it in the 1st couple of weeks of January. And that's what causes some of the slip from Q4 into the early part of the year. We are not double counting those numbers when we give our outlook for 2024. We are treating that as 2023 raised capital.

Speaker 3

And therefore, as we look ahead to this year, we do very much expect it to be in line with that, call it run rate average of somewhere between $90,000,000 $100,000,000 excluding the increase due to AEL closing.

Speaker 5

Got it. That's super clear. And then just a follow-up on insurance. I appreciate the color there on the 12 $15,000,000,000 of annual, annuity production. Just I guess, maybe longer term, What's the appetite to do even more deals over time at the parent, the capacity at the parent to do more insurance deals and both struck this division even to a larger extent and expand that 12 $15,000,000,000 in future years?

Speaker 3

Great question, Brian. And obviously, that will be update That will be up to the team at BN Re. But what we would say is with the upcoming closing of The AEL transaction, that business has very, very significant scale in the United States and becomes one of the market leaders and can deliver tremendous amounts of organic growth very accretively. Therefore, If BN Re was to consider further deal activity, we do expect that they may that are alternative markets beyond simply the United States.

Speaker 5

Great. Thanks very much.

Operator

Thank you. Our next question will come from the line of Cherilyn Radbourne with TD Cowen.

Speaker 6

Thanks very much and good morning. Connor, I wanted to start with a question for you. In the VGTF press release earlier this week, you were quoted talking about how one of the emerging trends in transition investment involves supplying renewable power to the data and technology sector. And I was just hoping you could elaborate on that a little bit and talk about how much of the second fund do you think will be devoted to that type of activity?

Speaker 3

Good morning, Sheryl, and love that question. Thank you. Maybe just to take a step back and lay the groundwork a little bit. There's not much doubt that the leading technology companies around the world today are the largest and fastest growing businesses. And the way those businesses are growing is through cloud and AI and the way to deliver cloud and AI is through the build out of more data center capacity.

Speaker 3

This obviously presents a tremendous opportunity for our structure business and its leading data center capacity or its leading data center platform. But perhaps One thing that we feel is not entirely recognized is with the new large scale data centers that are required to support the growth of cloud and AI. These are very large, computationally intensive and energy intensive. And therefore, putting one of them on a power grid has a destabilizing impact. And the large tech companies want to put multiple data centers on each power grid around the world.

Speaker 3

And therefore increasingly in order to get your data center permitted, you have to come with a power solution as well. And in an indirect way, power is now on the critical path to growth for the large tech companies. And this is a real opportunity for Brookfield because we are perhaps one of, if not the only provider who can provide not only scaled data center capacity, but also scaled clean energy solutions on a global basis to enable the growth of these large tech companies. And this is not A market opportunity for the future. This is a market opportunity right now.

Speaker 3

It lends itself to not only those that have the capital and the capabilities, but also those that put the work in, in the past and have the platforms and the pipeline available to service these growing technology companies. And it's been a huge driver of our business in both infrastructure and Renewable Power and Transition. And to tie it all up with answering your question, I would expect Renewables to continue to be somewhere between 35% 50% of our global transition

Speaker 6

fund. That's great color. Thank you. And then separately, the letter to shareholders mentions that your existing LPs made a lot of crossover investments in the latest round of fundraising. Can you talk about what that sort of crossover ratio is across your client base currently and where you think that ratio can go based on your benchmarking?

Speaker 3

Certainly. So It's obviously different fund to fund, but probably a rough rule of thumb that can be used is

Speaker 4

Approximately

Speaker 3

50% of the capital we raised across 2023 came from re ups from existing fund investors, 25% came from crossover investors and 25% came from new investors. That's probably a good rule of thumb breakdown. We are seeing that 25% from crossover investors Certainly, the fastest growing of those three proportions and that's simply a function of our growing relationships with our clients and our ability to offer more products that might meet their interests.

Speaker 6

And so just on average to dig a little deeper there, like on average, how many funds does the average LP investing with you? And where do you think you can take that over time?

Speaker 3

Certainly. So the number today is about 2. The average LP we have is in approximately 2 of our funds, 2 of our strategies. We think there's lots of runway for growth in that number. We could see that number doubling over time.

Speaker 3

It is a process and something we work with our clients on, but we do see that number moving in only one direction.

Speaker 6

Thank you for the time. Thank

Operator

you. Our next question will come from the line of Alexander Blostein with Goldman Sachs.

Speaker 7

Hi, good morning. Thank you for the question as well. So Connor, lots of discussion around product development And helpful color, obviously, around the $75,000,000,000 plus minus that you guys expect to get over time per year outside of Flexus. Curious how that impacts your balance sheet strategy. So with respect to any GP co invest to kind of seed some of these products and accelerate the growth, How do you think about utilizing something in that $3,000,000,000 cash that you currently have on the balance sheet?

Speaker 7

And I guess related to that, how does that inform your acquisition strategy as well? Hey, Alex, it's as well.

Speaker 4

Hey Alex, it's Bahir. Maybe I can just start off and Talk through the balance sheet strategy and then probably Conor will chime in just on acquisitions and such. So look, as we noted in our Investor Day and our call Last quarter, the most immediate uses for the balance sheet resources that we have in hand will be used to make GP commitments in a number of the complementary equity strategies that we have. In addition to using some of that capital to seed new verticals, new strategies and also to do selective GP acquisition. So that's the strategy.

Speaker 4

That's what we're highly focused on. Some of the near term initiatives that we're working on and Conor touched on most of these in his remarks, but we'll be allocating capital towards Pine Grove, our technology secondary strategy. We've got our special investment strategy or BSI within our private equity group that we're also allocating capital to. 2 secondary strategies, 1 in infrastructure, 1 in private equity. We're also going to be committing capital to and then the 2 exciting new initiatives that we talked Today being the Middle Eastern Private Equity Fund in addition to the financial backbone or infrastructure strategy as well.

Speaker 4

So We're finalizing our plans. We don't have all the sort of final numbers on all of that, but just wanted to give you an idea of all the vast amount of things that we're going to be doing to assist a number of our business units. And these strategies are going to be very additive to our franchise going forward. And maybe Conor will speak to GP acquisitions?

Speaker 3

For sure. And I don't have much to add beyond what Bahir said, other than to say that, we're very fortunate to have Very strong financial resources on our balance sheet. And between some of the Tactical GP M and A that we mentioned in our remarks and the seeding of the new product development, That is where we expect the vast majority, if not the entirety of our balance sheet to go towards. We certainly view those as both the most accretive and the most growth enabling opportunities for that capital.

Speaker 8

Great. That's helpful. Thanks.

Speaker 7

And then my follow-up is around the fundraising targets you've laid out for 2024. So as we sort think about the $90,000,000,000 to $100,000,000,000 of fundraising you expect to see this year, as the business becomes more diversified, the sources of that have obviously So you have insurance, you have traditional style kind of LPGP funds, you got wealth. So help us maybe frame what's the fee bearing capital associated with that $90,000,000 to $100,000,000 And then ultimately, what's kind of the blended fee rate you guys expect to come in? And I understand it's not going to all come in on day 1, so it's not all going to hit 2024, but help us maybe think about how this fundraising dynamic translate into actual management fees? Thanks.

Speaker 4

Alex, it's Bahir again. There's probably a lot of details. As you can imagine, we've got, as I Noted in my remarks, we've got 50 strategies that we're going to be out fundraising on, and that's just on the what we call the complementary strategy side of things in addition to the 4 flagship. So with respect to fundraising, the way For 2024, the $90,000,000,000 to $100,000,000,000 target that we've set out for ourselves, you should expect a third of that to come from the flagships that we're still fundraising for. And as you know, we're in fees on committed capital there.

Speaker 4

A third will come from the complementary strategies. You could say half of those will come from equity related strategies, so financial infrastructure, Middle Eastern Private Equity, catalytic transition, secondaries, etcetera, and half of those will be from credit funds. So we'll be out in the market next year with our real estate finance fund. Our Royalties business is growing, our consumer finance business, LCM is also growing, number of strategies in Oaktree, 17 Capital, etcetera, Lots of great things happening there. So broadly speaking, maybe half of that will be based on invested capital versus committed capital and it generally takes us 3 years or so to invest that capital.

Speaker 4

And so again, 3rd comes from flagships, 3rd from complementary strategies, about 15% or so, 20% comes from Insurance inflows that Conor touched on will get paid on those right away as soon as we get them. And then there's your normal course co investments that we do, perpetual strategies, semi liquid, etcetera. So lots of things and I'd say from a fee perspective, The average fees that we've had over the last couple of years, which is over 100 basis points, will be consistent. We expect that to be consistent heading into 2024.

Speaker 7

Great. Super helpful. Thank you guys.

Speaker 4

Thanks, Alex.

Operator

Thank you. Our next question will come from the line of Mike Brown with KBW.

Speaker 8

Hi, great. Thanks for taking my questions. Just wanted to start on the insurance side of the business. Can you maybe just on the timing for the AEL close. I think the hope was a year end close, but I understand regulatory approvals Take time, but what's maybe the updated view on that?

Speaker 8

And anything you can maybe expand on as to what has caused it to not yet close. And then just in addition to the scaling of the insurance business at the Brookfield Corp, Do you think you have the right asset mix and scale to continue to service the insurance balance sheets? Like, example, do you expect to need to kind of continue to scale the ABF business? And as you do so, does that actually set you up well to win some more 3rd party insurance AUM over time?

Speaker 3

Mike, thanks for the question. In terms of the AEL closing process, I would say it's Very normal course for a transaction of this type. In November, we received overwhelming support from the AEL shareholders. We continue to work through the regulatory process and I would say we continue to target closing shortly. Nothing really to report and certainly nothing out of the ordinary in how that process is progressing.

Speaker 3

In terms of how our platform is set up to service that insurance balance sheet and 3rd party Insurance clients, we feel that we are extremely well positioned today and we'll only go from strength to strength in that regard. Really our process of being well position to service insurance started in 2019 with our partnership with Oaktree and giving ourselves access One of the largest and broadest credit franchises in the world, obviously with credit being a key asset class to service insurance. When you were able to pair credit with the long duration inflation linked that we have across real estate and infrastructure and renewables, we really feel that we have a product suite that is relatively unmatched in terms of servicing those clients. All that being said, there's room to run. And as we think about some of those tactical M and A opportunities, one that is top of mind are other credit type initiatives that may be well suited to service insurance clients.

Speaker 3

So Your question is spot on. We think we're well positioned today, but can go from strength to strength in the future.

Speaker 8

Okay, great. Thanks for all that color. Maybe a question for Bahir. In 2023, the consolidated margin came in around 54 As we look out to 2024, you've got a lot of moving pieces that are falling into place, and certainly some large fundraising numbers that will kind of come through throughout the year. Is it possible that the margin gets back to the 56% level, I think, wasn't kind of the prior year period.

Speaker 8

And what is kind of the run rate margin expansion potential that we should think about when we look beyond 2024?

Speaker 4

Hey, Mike. Certainly. So look, when we're reporting and usually refer to our margins, we do it on sort

Speaker 5

of a

Speaker 4

proportionate basis to taking all the Brookfield related activities and taking Oaktree at its share, etcetera, and to come up with a net to BAM proportionate sort of margin of 56 percent for the year. So that's down 200 basis points from the prior year and our target starting in 2024 is to get back to Certainly, prior year levels and even higher for the years beyond. Lots of execution ahead of us, but that is at least the target that we've set out for ourselves internally as an organization.

Speaker 8

Okay. That's very helpful. Thanks for that.

Speaker 4

Thank you.

Operator

Thank you. Our next question will come from the line of Craig Siegenthaler with Bank of America.

Speaker 9

Hey, good morning, everyone. My first one is another one on AEL. There's quite a few odd managers with partnerships with annuity underwriters now, and they're all looking to grow. So it looks like competition is intensifying. At the same time, Interest rates are now falling, which do indicate that annuity sales may also go down.

Speaker 9

So I know the ROE and NIM doesn't exactly matter for BAM, it's more of a BN issue. But higher competition could impact your retail channel flow. So my question really is, what are your thoughts on the competitive landscape today?

Speaker 3

Good morning, Craig. Thanks for the question. There would be 2 answers to that question. 1, The nice thing about the AEL transaction is we have a playbook that we just executed on through American National. And we knew exactly what we did there in order to drive growth and increase profitability in that business.

Speaker 3

And we see a lot of the same attributes and opportunities upon closing AEL. And yes, the market backdrop will influence that, but we think a lot of the near term performance and growth is going to be within our control. And while interest rates and competition may have an impact. The second point is upon closing this transaction, we have very meaningful scale in the United States. And that will be a key differentiator and a competitive advantage that positions us well Even in a differing interest rate environment that may be more competitive, we think our scale will continue to provide A competitive advantage and a bit of a moat that will allow us to continue to drive that call it $12,000,000,000 to $15,000,000,000 of growth annually.

Speaker 9

Thanks. My fault is on Real Estate Fund 5. So the last two vintages were $15,000,000,000 You already raised $8,000,000,000 through January, so more than halfway to the prior sizes. I wanted your perspective on kind of recent conversations with LPs, Feedback from the road shows. Do you think you're going to be able to hit the $15,000,000,000 level by your final close, which I think you said will be later this year.

Speaker 9

So we're penciling in around 4Q 2024 for the final close of Real Estate Fund 5.

Speaker 3

Yes, like very little concerned. We're thrilled with the traction that the fund has been getting. And really, It's important to recognize what our flagship fund offers. This is a fund, an opportunistic real estate fund that has delivered 18% net IRRs across 4 vintages to date and if for lack of a better term perfectly suited for the current market environment. So I would say the traction is very strong, A first close at more than 50% of the fund target is a very, very strong indication and a point we would highlight is that's very much in line with the previous ones as well in terms of their first close.

Speaker 3

And perhaps the thing that gets us really excited is, the re up rates we're seeing from our clients are particularly strong in real estate. And that's really a function of our franchise and something that gives us confidence in hitting that target fundraise this year.

Speaker 9

Thank you very much.

Operator

Thank you. Our next question will come from the line of Nik Priebe with CIBC Capital Markets.

Speaker 10

Okay, thanks. I wanted to ask a question about fundraising dynamics and your experience with the 2nd iteration of the transition fund. I think you've suggested that you're anticipating an expansion in the number of LPs in Fund 2. But considering that the vast majority of assets in the first fund are still unrealized, As you seek to broaden the investor base, does that create an impediment for a subset of investors? And in that context, not to put the cart before the horse, but Would you expect more success or momentum on that front for the 3rd vintage specifically considering that the inaugural fund at that time would be a bit more mature in its life cycle?

Speaker 3

Thanks, Nick. Perhaps a few things to unpack there. The first I would say is a let me start by saying, yes. We have a very strong belief The number of LPs in BGTF-two will dramatically meaningfully exceed the number of LPs in BGTF-one. The first reason is a macro reason, which is, although we're only, call it, 3 years between fundraising for success of vintages, 2 things have happened in the market on a very accelerated pace over those 3 years.

Speaker 3

One is many institutional investors around the world either now have a transition allocation or they have at least determined where within their business transition investments fit and they have a dedicated pool of capital towards those types of strategies. That dynamic has increased meaningfully versus 2021. And therefore, we are seeing a much broader opportunity set in terms of LPs looking to deploy in these types of strategies. The second one is entirely commercial, which is the last 2 or 3 years have demonstrated that investing in transition is a very, very attractive risk adjusted return and a very large and growing attractive commercial strategy. And therefore, we are seeing not only bigger allocations, but more investors allocating to the space.

Speaker 3

If those are the macro dynamics, the comment I would make more specific to Our cadence of coming back to the market is, yes, we don't have realized marks in BGTF-one yet as a result of the fund only being largely invested over the last couple of years. But What we're seeing from LP partners, both existing and new potential partners is, it's very clear some of the key macro trends that we got out in front of, and some of the very attractive value entry points we secured in that BGTF-1 fund. And therefore, while there aren't realized marks that people can rely on, the value entry points that we were able to secure using our scale and using our operating capabilities are very obvious to investors and I would say quite supportive of our fundraising for BGTF2. So is it an unusual dynamic? Perhaps.

Speaker 3

Do we view it as an impediment to fundraising? No, we do not.

Speaker 10

Okay. That's good color. And then just shifting gears, I understand the way that carried interest is shared between the manager and the corporation. It won't be a meaningful contributor to the distributable earnings in the immediate future. But I was wondering if you could talk a little bit about How much carry you've accrued so far?

Speaker 10

And just how big you envision that component of the earnings profile becoming in the longer run, say, 5 years from now?

Speaker 3

Certainly. And maybe just as a reminder to everyone, at the time of the spin out, accrued carry was left at BN. So we were starting from a clean slate. And then on go forward, Carrie, 1 third goes BN and 2 thirds remains with BAM. So, exactly as was just mentioned, we do not expect realized carry to be a meaningful part of our DE for the 1st 5 years post spin out.

Speaker 3

To date, our accrued carry has reached about $200,000,000 but we expect that to continue to grow very, very meaningfully going forward. And by the end of the decade, I think In our Investor Day forecast, we suggested that by 2029, we expect to see realized carry in approximately the $2,000,000,000 range with that more than tripling in the 3 to 4 years following that. So, while it is a bit deferred in the future, this becomes a very meaningful driver of our economics come the latter portion of the decade.

Speaker 10

Okay. That's it for me. Thank you.

Operator

Thank you. Our next question will come from the line of Kenneth Worthington with JPMorgan.

Speaker 11

Hi, good morning. Almost good afternoon. Thanks for taking the questions. We're seeing renewed concerns about the commercial real estate market in the U. S.

Speaker 11

I would say punctuated by some comments by Janet Yellen highlighting some risks here. How do you see the investment in realization environment sort of developing in 2024 in your real estate business broadly as the year continues to roll on?

Speaker 3

Certainly. Thanks. Thanks, Ken. Maybe just a couple of points here is, There is no doubt that there is a little bit of stress in certain portions of the real estate market. But Well, that stress that temporary stress is a reality for some.

Speaker 3

It's also an opportunity for others. And with the breadth of our real estate franchise, and how we fund our businesses, we're in a great position to Ride through this environment continue to keep refinancing our businesses. And the one thing that's often being overlooked in the real estate market right now is high quality underlying assets are performing exceptionally well. The issue is on funding and liquidity as opposed to underlying operating performance. That's certainly what we're seeing in our portfolio.

Speaker 3

So you combine that strong operating performance with how we fund our businesses, We see a path to riding through this, but this is where the opportunity is created. And we mentioned that We're seeing great traction for our Bezrep franchise that's in the market. It is well positioned to take advantage in this market environment and secure some very, very attractive value entry points. And that's why I think we're seeing such strong fundraising success there. The second part of your question went to asset liquidity.

Speaker 3

And perhaps I'd make a comment That applies to real estate, but perhaps applies to all of our asset classes. Throughout 2023, Interest rates were increasing, but more important than them increasing was their trajectory was uncertain. And that uncertainty did not make for a robust environment for capital recycling and for monetization. What we saw across real estate as well as our other asset classes like renewable and infrastructure is high quality assets of small to medium size could still receive very, very attractive bids and we monetize assets across all of our platforms in that way. But what was more difficult in that environment was large scale monetizations.

Speaker 3

With increasing stability in interest rates, we do see that market coming back in 2024. It'll take time. It will, we think accelerate throughout the year. But the good news for us is we were able to use our scale to invest in 2023 when there were very few bidders. And we made the conscious decision to not force ourselves to realize assets in that market and more appropriately wait for better time.

Speaker 3

So All in all, we do see liquidity accelerating throughout 2024 not only in real estate, but across our asset classes And that's simply a function of the uncertainty in the market increasingly being removed as interest rates stabilize.

Speaker 11

Okay, brilliant. Thank you. And maybe for Bahir, I think this is more of a clarification. Credit had a substantial pickup in inflows and outflows this quarter, Page 25 of the supplement. And it looks like the insurance piece was a big driver of that on Page 7 of the supplement.

Speaker 11

Is there anything seasonal about the 4th quarter or was it Argo that really impacted the 4th quarter inflows and outflows? And as we think about the insurance contribution to your fundraising target, the $15,000,000,000 to $20,000,000,000 guide over time, is that a gross number Or is that sort of a net number net of the outflows that the insurance piece kind of sees? So Just trying to figure out how to think about that in the context of the longer term fundraising guidance.

Speaker 4

Ken, you're absolutely correct. The 4th quarter insurance Inflows benefited quite substantially from the Argo transaction that we spoke about. With respect to the outflows within credit, We may I may just want to clarify that with you after the call, but it may have been some funds that reached the end of its cycle, if I remember correctly. And then with respect to the last point, the 15% to 20% is a net number that we're using based on the forecast of the various platforms that we have that we have built in our insurance business. Aside from the annuities business that gets sort of all the that gets all the headlines.

Speaker 4

Brookfield Reinsurance has also built up or is in the process of building up a Sizable Pension Risk Transfer Business in the U. S, where it started to bid on mandates at the latter part of 2023 and there's going to be considerable growth coming from that channel in 2024 and also are in the process of building a similar business in the UK where that market is also quite significant.

Speaker 11

Okay, brilliant. Thank you very much.

Speaker 4

Thanks, Ken.

Operator

Thank you. Our next question will come from the line of Mario Saric with Scotiabank.

Speaker 12

Good afternoon. Just two quick ones on my end. Bahir, your comment on expected outsized growth In FRE in 2024, is that expectation or the definition of outside kind of is that relative to 2023 actual growth or your target kind of FRE growth of 15% to 20% over time that you outlined at the Investor Day? I just want to clarify kind of what you thought about when you said outsized?

Speaker 4

Hi, Mario. Yes, apologies if I've confused in terms of Definitions, but we set out that 15% to 20% CAGR that we expect to deliver on from an FRE perspective over the planned period. And to clarify what I meant is 2024 should be should exceed that target, just even given all the capital inflows that came in, in 2023, That alone should be a big contributor in addition to expenses moderating as we noted and then we've got such a healthy pipeline for 2024. So that's what I really meant.

Speaker 12

Perfect. Okay. And just as a quick follow-up on your commentary on the margin, coming back to 20 2 levels, I. E, about 100 basis points up year over year. Is that inclusive or exclusive of AEL and the capital coming in from

Speaker 4

It's all in Mario, it's all inclusive.

Speaker 12

Got it. Okay. And then my second question, Maybe dovetailing on the previous question just in terms of 2024 transaction volumes, monetization and so on. There was a comment both in the press release and the shareholder letter On real asset valuations responding according to busy transaction activity over the next few years. I think, Conor, you mentioned it may be a bit slow to start, but it's expected to accelerate.

Speaker 12

Are you suggesting the expectation that valuations are expected to rise from here on in, I. E. Valuations of trough? Or do you think narrowing in the bid ask spread will materialize resulting in lower valuation initially, which will be the ultimate catalyst to reignite transaction volumes?

Speaker 3

Mario, the answer to your two questions at the end is both. But perhaps I'll clarify maybe something I said a moment ago. We are already seeing transaction volumes in the early part of Q1 higher than they were in Q3 or Q4 of 2023. So while we do expect them to continue to accelerate throughout the year. We're off to a very strong start in terms of that acceleration.

Speaker 3

And Really for high quality assets, I would say the bid in early 2024 has been very, very robust. And what we are seeing is, New Year allocations, stability in interest rates and in an increasingly open financing market, really being a driver of 1, enhanced transaction activity and 2, creating an environment that's more supportive for valuation. So the point I would make is the answer to your questions is it Both. But I would highlight that it's already started. It's not something that we're only forecasting for the future.

Speaker 12

Okay. Those are my 2. Thank you.

Operator

That concludes today's I'd like to turn the call back to Connor Teske for closing remarks.

Speaker 3

Great. Thank you. Go ahead, Jason.

Speaker 1

Great. I'll just say if anyone actually have additional questions on today's release, please feel free to contact me directly. Thank you everyone for joining us We'll see you next

Operator

time. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Brookfield raised $140 billion of capital to date including $93 billion in 2023, achieving record closes for infrastructure and private equity and delivering 6% growth in fee-related earnings and 7% in distributable earnings to $2.2 billion each.
  • With inflation stabilizing, interest rates peaking, and enhanced market stability, Brookfield begins 2024 with over $100 billion of dry powder and expects improved liquidity and transaction volumes to drive further monetizations and deployments.
  • The pending AEL reinsurance acquisition will boost Brookfield Reinsurance’s fee-bearing insurance capital from $35 billion to $80 billion, supporting an annual annuity production target of $15 billion–$20 billion, while the BOSE private wealth channel aims to raise $12 billion–$15 billion per year.
  • Brookfield continues to expand its product suite with launches such as Oaktree’s Lending Partners Fund, a €10 billion private investment-grade debt fund, the Pine Grove secondary VC/tech JV, a Middle East private equity fund, a financial infrastructure platform, and a multibillion-dollar catalytic transition fund with Ultera.
  • Having made significant platform investments, Brookfield expects cost growth to moderate in 2024, driving outsized fee revenue growth and margin expansion, and has declared a 19% dividend increase to $0.38 per share for Q1 2024.
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Earnings Conference Call
Brookfield Asset Management Q4 2023
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