Should You Hold Brookfield Asset Management Ltd. (BAM)?

"On December 9th Brookfield spun out its management company, which takes the “Brookfield Asset Management Ltd. (NYSE:BAM)” name and BAM ticker. BAM is an “asset lite” alternatives manager, which means that it invests fee money raised from external investors instead of its own balance sheet cash, on which it charges both management and performance fees. BAM has approximately $400bn in Fee Paying Assets Under Management and is set to grow its AUM, and therefore its fees and earnings, by around 20% per annum for the next few years, with most already contracted out. In addition, BAM is well positioned for the current interest rate environment: approximately 60% of BAMs funds invest in real assets (for example, real estate, infrastructure, and clean energy), and about 25% in credit (drawing on subsidiary Oaktree’s expertise in distressed credit, which could benefit from less benign interest rates). The spin, therefore, is an effort to “unlock value” by highlighting BAM’s attractive financials and growth prospects, hopefully leading to a valuation uplift. Asset lite alternative managers with similar financial characteristics trade for 20x P/E vs. 10-12x for “asset heavy” competitors. The parent company, now called Brookfield Corp and with ticker BN, should benefit from this revaluation, too, as it owns 75% of BAM.

It is tempting to try and devise clever ways to arbitrage the valuation discrepancy between BN, given its discount to net asset value, and BAM. The asset manager BAM is attractive because it can benefit from faster growth (fees should grow in line with AUM growth). Yet, there is more scope for capital allocation with BN. Firstly, BN can invest its share of profits from BAM in its balance sheet investments. This dual compounding should add up to significant growth, even if, in the short term, the market does not attribute extraordinarily high multiples to “asset heavy” businesses. Second, BN can buy back shares whenever the company is undervalued. Finally, I think it usually pays to ride along with Mr. Flatt and co. as they take advantage of wild mispricings. For example, as recently as April 2021, Brookfield took Brookfield Property Partners private for approximately $18/share after the price had fallen from roughly $26/share as the market worried about the potential impact of Covid and work-from-home on the rental income from its commercial real estate. So, I am happy to own both shares following the distribution."