Chit Chat Stocks - Brookfield Asset Management (BAM) | Not So Deep Dive

Episode Date: May 10, 2022

Brookfield Asset Management is an alternative asset manager that focuses on real estate, renewable power, infrastructure and venture capital and private equity assets. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Brookfield Asset Management. Enjoy the show! This episode is brought to you by Masterworks. Join a community of 400,000 investors with access to exclusive blue-chip art investments. Use our link and get access today:  http://masterworks.art/CCM Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Contact us: [e-mail] Timestamps Company Background | (5:36) Industry | (11:36) Management & Ownership | (12:48) Valuation | (16:58) Earnings | (19:51) Balance Sheet | (21:14) Our Analysis | (23:48) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money, a show where we go over an individual stock for about 30 to 45 minutes. If you do not know a

stock before listening to this or the stock that we're covering on the show, this is a great episode for you. If you are an expert on the company already, this is probably not the one you want to listen to, you're going to want to hit our Thursday episodes. Unless you want to critique us. Unless you want to critique us because the way we do these shows is we get about a week of research and then we go in for our first look and decide if we want to research further. So we're kind of at the beginning of the research process, but we think it's really great. I just want to clear that up because some people get confused on what the type of shows are, but we're talking Brookfield Asset Management today. That was a recommendation from one of the listeners. I got

to say that listener gave us a big homework assignment because it's a hard one to understand we have brad freeman on the show today brad ryan uh what was the difficulty level as i'm trying to understand this stuff i want to i want to take a moment to apologize for giving you guys this homework assignment and to the listener that recommended this shame on you not really thank you thank you for the rec we always appreciate the recommendations but this was we learned i Difficult to understand. Yeah, we probably learned a lot. I mean, Brad, was it difficult for you to learn about this one as well?

I mean, so there are AI ML black boxes, and then there are asset manager black boxes. And this seems like an asset manager black box. But I mean, it's a fascinating company. I'll leave it there. Yeah, I mean, great shareholder returns over the last few decades. So there's something there. And we're going to let Ryan try to describe the company. Try.

But before we get into it, we need to talk about our sponsor for this show, Masterworks. Masterworks is a, well, I would describe an art investing platform with, you know, an ability for, say, an individual like ourselves to invest in blue chip art. If you didn't know, contemporary art pieces have outpaced the S&P 500 total return from 1995 to 2020 by 164%. And that is a time when the market was doing quite well. And it's also incredibly stable. When the markets plummeted in 2008 to 2009 and the S&P tanked 57% peak to trough, this asset only lost 27% of its value. That's a shocking stat, the market outperformance for the last 25 years. Yeah, exactly. So, I mean, Masterworks is a great way. If you're interested in investing

in blue chip art, I would just... It's a cool way to do it for sure. Yeah. I mean, I don't know. It has over 400,000 members. It is a good way to tuck away a portion of your wealth if you're looking to, and this is kind of funny that we're doing an alternative assets thing here, assets manager for the show. This is a different way if you're looking to, you know, if you can't get into real estate, if you don't want to get into cryptocurrency, This is your way to be an alternative asset manager. Exactly. So what they say here, unlike NFTs or cryptocurrency,

art is a real tangible asset, just like real estate. And Masterworks lets you easily do that. So let me get the code we have here. You want to go to masterworks.art.ccm. The link is in the show notes. You can get a discount on your whatever, you know, you can get a discount on your investment. No, I think you get priority. Priority access.

Excuse me. Yes. Right, right. It's getting that right. You can get priority access on your, I don't know, investments. And it's a pretty cool thing to do. It's like, it also seems like a fun thing to do as well. So if you're interested in blue chip art, and you want to get good returns, I go check them out. Brad, are you an art investor? Wait, wait, let me say, I got to say it twice here. Masterworks.art slash CCM. Link is in the show notes. See important regulation aid disclosures at masterworks.io slash CD. Brad, what do you want to add here? Yeah, no, I just think it's a wonderful way to diversify with something that is both reliable and stable. This is art. This is fine art. These are Banksy's

and Picasso's. This is not NFTs and that kind of thing. So I just wanted to get that point across. And I'm actually on my newsletter also partnering with them because I feel the same way about them in terms of nice things to say. And so, yeah, excited about that and just a lot of nice things to say about this company. If you want to claim yourself as an owner of the Mona Lisa or a Picasso. Maybe not the Mona Lisa.

I don't know if that's up for sale, but it's just, they're a pretty reputable firm. So if this is not like a sketchy organization at all, they're definitely legit and they're a great way to, I don't know,

probably the best way out there. If you're not really rich and wealthy, which you're listening to this show, I'm assuming you're not. Or even if you are, it's a great way to invest in blue chip art. All right, Ryan, introduced Brookfield Asset Management, or otherwise known as maybe BAM, B-A-M, or Brookfield,

just Brookfield, maybe. Yeah. So they are, as we all alluded to earlier, difficult to understand. And so I've got a quote here from the Financial Times that I think encapsulates them pretty well. They say, what exactly Brookfield is and how it operates is maddeningly difficult to ascertain. To unpack the Canadian group's accounts is to discover not so much a company as a giant triangular jigsaw board that spreads across the world and covers assets worth $500 billion. It's more than $500 billion now. That article was written a while ago, but I think that was a good way to describe it. So I'll try to kind of put my own spin on it. Brookfield Asset Management is one of the world's largest alternative asset managers. And when I say

largest, that includes 180,000 employees, $690 billion in AUM or assets under management. and it means that they can invest across virtually any asset class. So they've got private investments, they've got real estate investments, public equities, I believe as well. And they focus their investments in a few sectors. So the sectors they talk about are renewable power and transition, infrastructure, private equity, real estate, and reinsurance. And the interesting part about each of those investments categories is that they are all, I believe all of them are public companies in and of themselves as well. So Brookfield Asset Management actually owns portions of those businesses. It doesn't own them outright.

So Brookfield Asset Management owns 63% of the private equity business, 30% of the infrastructure business, 61% of the renewable power company, and 51% of the property business. Brad, do you have anything? Would Liberty be a good comp for this company and how they kind of do that? Yeah, I think a little bit because Liberty doesn't have like outside LPs, unless I'm wrong. I'm no Liberty expert. That sort of convoluted structure, I think, is reminiscent of how Liberty used to operate. But it's like a hybrid of Liberty and KKR. It's flexible capital, too. Like you can move capital from one place to the other, a lot like Liberty in that sense. But... They did that. They had to like fund one of the real estate funds. There have been asset swaps before where one of their companies sells something to another one of their companies, which is a very strange thing that kind of, I think they call it recycling capital. But anyway, each of those businesses, so those subsidiaries, also have limited partnerships that are associated with them.

So limited partnerships are just a private funding source, essentially. So you as a shareholder are giving them public funded sources. And then they also raise money from big institutional investors. So if you're a public shareholder, you participate as technically the general partner. So you're getting those fees from, say, a pension investing in that limited partnership. Yeah. And you're not getting a, what's it called? You're not getting a form with a blank on the form that you send out. K-1. You're not getting a K-1.

you're getting a typical right uh you're treated like a typical shareholder but the uh some of the institutional investors include uh like the is it the saudi wealth fund i think it's qatar they're big with the qataris qatar um big pension funds uh just huge institutions like that they're in canada so canadian some big canadian pension funds are uh with them and then the the revenue generation is through management fees and performance fees. So like a typical limited partnership. And then the, I should also mention that they primarily use the funds to invest in hard assets. So it's not necessarily something that's buying a ton of digital businesses that are making investments in very, in physical properties often. So like office buildings or

mines or land it's very i guess uh durable in that sense yeah toll roads um data centers stuff like that yeah uh but i'll talk about the history because this one's pretty fascinating so brookfield actually began out of a family feud and a 15 million dollar inheritance so i'm not talking about family feud the show i'm like there was a feud in a certain family uh so samuel Bronfman was the founder of the Seagram Company, and he made a fortune selling alcohol during the Prohibition days. At one point around 1952, he locked his two nephews, Peter and Edward, out of the Seagram offices and forced them to sell their shares at a discount. So I'm not exactly sure how that worked. That's all the color I could get on it. But basically, that was

the family feud. And then after selling their shares, Peter and Edward Bronfman teamed up with a shrewd accountant named Jack Cockwell and used their inheritance to acquire a Brazilian electrical utility company called Brascan or Brascan, I think. And apparently it was a really messy takeover deal and Brascan had just been nationalized by the Brazilian government. So it was infused with a whole bunch of cash. And so the brothers and Jack Cockwell used that cash to buy pretty much anything and everything.

So it's things like breweries, sports teams, forests, mines, real estate brokers, investment banks. They were just acquiring assets left and right. By 1980, the brothers were two of the richest people in Canada. And now today, the company consists of dozens of separate yet also intertwined public and private companies. So if you're digging through their annual report, you're probably going to be lost. Hopefully, that provides some context around how the business works. Yeah, but yeah, there is going to still be some opaqueness no matter how deep you dig, unless you want to spend months on this reading the thousands of pages across all the different filings, which I will, you know, we didn't do that for this show. Sorry to say, I don't think anyone does that really. But let me hit industry and competition. Pretty, pretty simple here.

BAM operates in the alternative asset industry, which is a vague definition, but it basically means stuff like private equity, venture capital, real estate, infrastructure, renewables, stuff like that. So, anything alternative to the public markets. The industry actually has an AUM of $9 trillion that grew by over $1 trillion in 2021. And BAM has $364 billion in fee-bearing capital. And Ryan mentioned above, what's the total? 690? 690 billion in total AUM. Sorry, go ahead, Brad. Yes, exactly. Competitors include KKR. We actually did a show on KKR. If you're interested in these companies, I would listen to our interview with John Rotonti on KKR. He gives a great definition of one of those. They're a little bit different. They're more asset-light, but yeah, I would listen to that if you're trying to understand these businesses better. There's Blackstone. I think people have heard of Blackstone. They're one of the biggest ones out there. There's the Carlyle group, someone like Bridgewater, who was one of the

giant hedge funds is also technically within this industry. The list really goes on and on and on. There's tons of competition, but I'll let Brad talk about management and ownership, which the year's management and ownership and balance sheet were one of the toughest homework assignments here. So yeah, I'd understand. Normally I get to spend like 15, 20 minutes doing, putting together my sections and I'm good to go. And you guys have the hard work, but this was, I mean, they don't believe in proxy statements, apparently. And so finding ownership data that's somewhat reliable was a little bit difficult. So I went basically to all the third-party sources and got a running mean or an average.

They didn't even list ownership in their annual filings. So yeah, tough to find. But according to all these sites, they were right around 11% insider ownership of the company. Institutional ownership, which has been growing over the last few years, was about 75% of the firm, Royal Bank of Canada and Vanguard near the top of that list. But Brookfield is actually listed as the top owner of their own company, which I guess is just another interesting quirk of being that asset manager and owning all of these subsidiaries and having minority stakes

in all of them. So yeah, no proxies, none of that. So if you're listening to this and there's somewhere that you found reliable insider info, please let me know because I could not find anything. But in terms of the management team, so CEO is Bruce Flatt. He has been in that role since 2002 and he was with the company since 1990. So 32-year tender, casual. So lengthy to say the least, a 71% Glassdoor rating, just a few hundred reviews. I mean, this company is not one to put their name in the ring for culture awards and for employer environment awards. So there's really not a lot to say there. But I mean, when you have a CEO in place for 32 years, I think that speaks volumes. But the CFO is Nicholas Goodman, another lengthy tenure, been with the company since 2010. He was the CEO of Brookfield Renewable Partners, which is one of those minority ownership subsidiaries that we've been talking about. And he's been the CFO for several years. And then, I mean, you just go down the list of all these departmental CEOs in the C-suite and it's 20-year tenure, 15-year tenure, 20-year tenure.

I mean, it's these people, this is, yeah, this is a trend that we really like to see and we don't see very often in public markets anymore. So refreshing and encouraging to me personally. Oh, they're making a lot of money. And especially non-founders too. And yeah, speaking of flat, I'll give a reference to the stock price performance since he took over. I think when I'm looking at Coif in here, it only goes back to 1997, but stocks up 5,000% since then. So clearly he's done quite a good job in creating shareholder value in that time. So there's, you know, he's got some fans.

I'm sure the long-term investors are fans. I'm sure he's made money since he's a long-term owner in the company. But it is quite fascinating to see them being able to keep almost maybe not everyone, but a majority of their executive team and managers around for 20 years. That does not happen very often. And there's also this is kind of important as well. And I want to have seen if I didn't read the Financial Times article, but there's also a company within the company, I guess, called Partners Limited, which is the controlling shareholder. So they say they have the power to override the votes of every other Brookfield shareholder combined. And it's basically, I believe, 40 financial partners that most of them are not disclosed.

So it's like 40 individuals or institutions. And it was designed. Flat's in there, right? The CEO. Yeah. Apparently it was designed so that people could invest alongside the company. But it's also, it's the most powerful entity. So they have total control.

Yeah, and you said inside, it's more of on top, right? Just a few Russian oligarchs. Maybe on the side. Yeah, yeah, we just have the Qatari crowd in there. He's no big deal. That shouldn't cause any geopolitical issues. Unnamed, anonymous. It's all good.

Yeah, they have the power to appoint nine of the 16 directors. And it's like they own the dual class. There's a dual class. So basically, yeah, they have all the power. It's for you. credentials to advance confidence to stand out in your career at regent university you'll join more than 30 000 world changers making a difference in high demand fields pursue your bachelors masters or doctorate online or on campus in virginia beach your degree from top ranked

regent university is waiting so is the world you will elevate say yes to your purpose and position yourself for a brighter future visit regent.edu learn more regent.edu learn more all right i'll into valuation. This is a tough one too. Market cap is $77 billion and ticker is BAM. However, market cap is, I would say, pretty irrelevant for an asset manager that invests stuff themselves and has a lot of debt. So the enterprise value is hard to calculate. I'll say I asked various people how they calculate enterprise value and they all did it differently. So I think this is kind of a build your own adventure here on enterprise value, but I came up with something around $69 billion. If you exclude investment properties or include them, that can change it

a lot because I have a hundred billion dollars worth of investment properties. You can also exclude or include non-recourse debt, which I don't know what to do with that. Do you want to explain that a little? Because only it's what only 6% of the debt belongs to corporation yeah the the corporation you were buying if you buy bam stock yes uh however i don't know what would technically happen brad will get into the details in the balance sheet but yeah it's technically like they they talk they talk they talk that up of how they have all this debt diversified across it and it doesn't affect the parent company if one goes under um but i still i don't know that just still makes me a bit nervous and it is difficult to value because they

own so many different things uh for example i was trying to look up these i think ryan mentioned them earlier but they own you know all those other public companies worth various amounts but they're also their own things that they manage so it's kind of just a pyramid structure but let me get some not a pyramid scheme no it's a pyramid structure yes it's not i hope not um but their enterprise value to net income is 5.6 and again if you calculate your enterprise value differently you're going to come up with slightly different numbers here if anyone's listening to this and I'm getting away off enterprise value than I should, let me know. Their enterprise value to fee-related earnings, which I think is an interesting one, was a 39. And fee-related

earnings, I like to look at that one because it's so durable, especially for an alternative asset manager, because you know, whatever their AUM is, they're going to be bringing that in. And they have the cherry on top of carried interest and performance fees. And then we'll have an enterprise value to their definition of distributable earnings, which is not GAAP or it's their own thing their enterprise value to that is 11 which i think is probably a good one to use as well probably the best metric maybe though but i get nervous about what are they describing as distributable earnings like it's just kind of are they pulling you know they have a lot of levers they could pull i imagine to create distributable earnings exactly

so i get a bit nervous but again this is one of those you have time to go some of the parts maybe it's harder than just doing it over a podcast. So Ryan, do you want to go earnings? Yeah, there isn't a ton to report here. So I'm going to basically go through essentially some of the same numbers that Brett did. So in 2021, BAM raised or Brookfield Asset Management raised $71 billion of capital across all of its segments. And that totaled to 690 billion. And then they generated 12.4 billion in total net income, and then 6.3 billion in distributable earnings. That was that figure that Brett talked about. And distributable earnings has grown at 20% annually per share annually for the last five years.

You said 20%, but you wrote down 29. Sorry, 29% per share annually over the last five years. So really strong earnings growth. Like I said, or like Brett said, it's a little hard to tell how much of those are going to be like recurring earnings versus how much are just recognized during that one year. So that's why it's important to pay attention to that fee-related earnings figure. And then the last thing I'll say is they paid out $0.88 a share in dividends this year. 41% of those dividends were in the form of a special dividend, so sort of a one-time thing. And that came out to roughly a 2% dividend yield. So some returns to shareholders there. There

isn't a whole lot of share repurchases, though. No, that's not how they like to roll. Brad, do you want to hit balance sheets? Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. Sure. So a lot of cash, $12.7 billion is kind of expected, but a lot of debt as well. So $10.8 billion in corporate borrowings, that's what's called

the recourse debt, where Brookfield Asset Management would actually be liable in terms of default and in terms of delinquency and things like that. But then they've got another $165 billion in non-recourse debt, which Brett was talking about. It's spread out across all these other entities that they have, where it's just, it's kind of another layer of legal protection in terms, I mean, as non-recourse would hint at, you can't go after Brookfield Asset Management, their balance sheet or anything like that, or their assets. In the case of a default, you have to go through one of these smaller subsidiaries, which offers another layer of protection for them, but still $165 billion in debt, really.

I mean, it does raise the bar for continued profitability and cashflow for all of these entities, which has been extremely consistent and extremely reliable. So not really a precarious dependency here, I don't think. And that's honestly, well, they've got 23 billion in net payables. So they use accounts payable to finance a lot of their operations. But other than that, not a lot to talk about. Yeah. The non-recourse stuff, it is like there is that protection, but they own interest in these other stocks. So if those go to zero, doesn't the value of BAM go down? But the debt isn't there.

Definitely. But the value goes down. I mean, one way or another, it is associated with the company. I don't know. Do we know for a fact that it's not going to hurt them? No, I mean, if there's a default, that would definitely, I think it would. I mean, they can't be entirely shielded. I don't know for sure, but to me, all this means is if there are liabilities or claims beyond what the assets are of these kind of these junior companies under the Brookfield Asset Management, then they can't claim more after they've taken everything from that under the entire parent company or the umbrella.

True. So they are liable, but it caps the liability. Yeah. And hopefully that's good. But I still think there's uncertainty with that. Maybe that's 100%. Obviously, yeah. Obviously, if one of these companies defaults on their debt that Brookfield Asset Management owns a stake of, it's going to impact Brookfield Asset Management one way or the other.

Yeah. Even though it doesn't go directly to them, even though they aren't the one defaulting on it. Yeah, true. This episode is brought to you by KPMG. As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities.

All right. Anecdotal evidence, Brad, anything? Yeah, I do not have any intimate knowledge of pro-fuel asset management. Yeah, you're not one of the 200,000 employees. So that's basically all the anecdotal evidence you could have. Yeah, no, I have not done any, uh, personal deals with Brookfield asset management, but I did read a story about them acquiring a New York city office building from Jared Kushner. Not entirely sure what the relationship is there. There's also, I think you're about to point to this. Uh, they've been in on some, any huge deal that needs financing. I feel like you could probably find a Brookfield subsidiary somewhere in there. yeah and this deal was weird like they they guaranteed 100 years of payments i don't on this building um and i think it was like office buildings during the pandemic so they needed a

buyer i don't know it's it was strange but anecdotally the articles i've read about them either from the financial times or bloggers or the historical ones be honest give me a bad feel yeah i'm just a little bit yeah i they don't they're like they are barely if an analyst asks bad questions like say maybe we're asking on the show or not bad questions uh they ask a question that is maybe going to be a critical one they'll get kicked out of any sort of analyst events and will basically get banned from asking questions ever again which i think is quite the red flag. Um, but well, I guess we'll get that later in the show, future growth opportunities, Brad, what were your thoughts on this one? Yeah, just a quick note. I mean, I just,

I listened to green thumb and this is a good segue into what I'm going to talk about, but green thumb, which is a cannabis grower and their, their earnings report and just the Q and a and how sharp and pointed and rude these questions were. It's just, I mean, it's, this is respect earned. And I think, um, I think that that's good to point out that it's, it's not inherent that, that these earnings calls are amicable, but, um, for future growth opportunities. I'd love to see them explore the cannabis industry. I mean, I feel like they could, with this legal structure, figure out a backdoor way in before the regulatory tide really turns and before a lot of people can. Multiples are dirt cheap, even before regulation. These companies

are all starved for cash and the industry is poised for 20% growth for a decade. I don't really think there are many other opportunities like that for this company to embrace a new vertical. And I think this would make a ton of sense if they could figure it out. But more generally speaking, I mean, the world of M&A has gotten a lot nicer to them over the last 18 months. I mean, the tumultuous times we've had in growth stock land and in stock markets overall, what that does is with this company that is flush with cash, it just makes multiples a lot more compelling for them to go be a serial acquirer and to add assets under management. So future growth opportunities, probably, I don't know for sure, but I'm assuming that they've been a little

bit more cautious than they would have otherwise been over the last few years, just with where multiples got and with how, yeah, I'll leave it there with how stretch multiples got, but now that's reverting and it seems like they'd have an opportunity to lean back in to kind of drive inorganic growth. Yeah. I mean, the growth opportunities for an alternative asset manager pretty much unlimited because they can pretty much invest in any vertical. So cannabis requires the capex for the warehouse and other warehouses, the greenhouses and that type of stuff, too. That seems that greenhouses and all that are the warehouse. I don't know what the exact definitions are, but those type of things could be right at their alley.

Right. Yeah. No, a lot of a lot of indoor real estate and row houses. And I just it feels like if their C-suite is willing to pallet being invested in the cannabis industry, which is not a guarantee at this point in time, it just it makes a lot of sense to me. But but I could be wrong. my growth opportunity is spinning off the asset management business now i'll be honest i thought this was its own thing going into this um because it is called brookfield asset management yeah so i'm not sure what's left of brookfield asset management minus the asset management well no it's the the actual direct holdings things they have the direct investments no i i got that now but going into it i wasn't sure what it was so they actually did

talk about this. Brookfield's management team said they're considering spinning it off because they think it could potentially be worth $75 billion on its own. According to Forbes, post-separation, Brookfield Asset Management will focus on growing its newly launched reinsurance and investment operations through $50 billion net of debts, directly owned assets across real estate, infrastructure, renewable energy, credit, private equity. So I forgot the reinsurance thing i saw that i guess we didn't even get to that in the show yeah yeah so they i mean that is one of their size advantages is they can when certain industry they get opportunities that others might not and so reinsurance big reinsurance it's kind of the

berkshire effect uh is something that has obviously high capital barriers to entry yeah but it's risky yeah yeah it is you better be good at insurance they said basically that they they're considering spending this asset off because the current investment sentiment is that people like asset light models. And so that would create one. So would this be all of say the $364 billion in fee earning AUM, basically stuff like that, those funds. I think so. Okay. I think so.

They haven't finalized, I guess. As soon as you, I, someone said this on Twitter too. It's like, as soon as you think you understand Brookfield, they restructure. Yeah. Well, that sounds, makes me comfortable as an investor. Now, all right. Well, I got mine, same stuff, but apparently they're in on the Twitter deal. They're part of the funding for Musk, 250 million in there.

We'll see if that goes through. 500. 500. Okay. But in all seriousness, that's really nothing for their size. But in all seriousness, data centers is a big growth driver and it's right at their wheelhouse. And that should be a steadily growing industry, either as someone who is leasing stuff to AWS, Azure, Oracle, GCP, whoever, Facebook.

They're rumored to be buying Switch, which is a data center company that is valued. The stock is valued at $7.5 billion right now. When it comes down to it, they just need more money into these deals and to get acceptable ROIs. Data centers, if the multiples have come down, maybe they can get a lot of money into these things at acceptable valuations. valuation. It's not super exciting, but that's not what they're looking for. They're looking for these leveraged buyouts with these things, and you're just going to generate a lot of cash from them. All right. Highlights and lowlights. Brad, what'd you like and dislike about this business? Yeah. A little redundant for me, but I have to mention it again. When you have a CEO

that's been there for 32 years and you have every single executive that it seems like has been there for more than 10 years, that's special and speaks to maybe how amazing their compensation package are, as you guys astutely pointed out. But also, I mean, how good the culture is. These people are hot commodities, and I'm sure they've had offers left and right to move laterally or upwards with other companies, and they're still here. Or they're still there, I should say. So that is a highlight. I love hints into strong culture. I know it's not super tangible, and it's pretty qualitative, but it still makes me a little bit more comfortable to own a company. So yeah. Oh, and then I'm sorry. And then little lights. So with that kind of respect and admiration for management in their 10 years, and then kind of combining that with, and I'm quoting from an article that I read, this is the CEO. So flat saying, we buy troubled assets and stress things. So that's phenomenal, but it does raise the bar for, I mean, sorry, that's the upside there is phenomenal, I should say, but it raises the bar for execution and continued execution.

And while we have a very long track record to kind of rest on with this company specifically, past performance, as everyone says in their earnings calls, doesn't guarantee future success or future results. And this strategy to embrace kind of the black sheep in terms of assets and in terms of what's on the market, it does, it raises the bar for management to continue to be a company strength. Yeah, I mean, interest rates, I guess I'll get into that in line. But interest rates, were the returns just interest rates have gone down in the last three decades? That's a big question for me. Ryan, what's your highlights and lowlights? Highlights, I think they must have an absolutely incredible legal team. They got to get paid well.

Like, yeah, I honestly question whether the executives understand their own legal structures. No, no, I don't think anyone understands. It's like a big bang. No one understands, like, does anyone actually understand every single part of J.P. Morgan? Like that SpongeBob here? Like, imagination. Exactly. It's a, I don't know, does Jamie Dimon understand every single thing that's going on in J.P. Morgan?

No. And that's, I don't know. It's probably the same, right? Yeah, I'm sure. Some of the actual highlights besides the incredible legal team is that their size does give them opportunities that other firms might not have access to. They also have so many different components to their business that I think they're easily able to attract capital. So when they need to raise money, they're able to do it. I mean, $71 billion this year is a ton of money.

Um, and then also their dependence on hard assets, I would think is more resilient through periods of high inflation. So maybe there's some durability in that sense. Lowlights for me, I put here, WTF do I own? I don't know as a shareholder, what exactly I'm owning. Um, and I'm sure if I did maybe enough digging, I'd, I'd understand it, but I don't know where the capital flows. i don't know um for one that that partners limited or limited partners whatever runs the company

like you as a shareholder are yeah i like how it's not gonna matter i like how flat said no it doesn't really we don't do much with it but it's there it's like why is it there yeah and then because yeah i just don't worry about it don't worry about it it's over there i have a hard time reading where like where the money's going no no no one knows i mean like we can give this homework assignment you get back to us in 2030 you know like could i don't know could be could there be self-dealing under the hood i don't know i have absolutely no idea i think there is um that's not necessarily a bad thing but there also could be impaired assets here that i'm you know what i mean that's kind of yeah all right mine my highlights there's been a great

tailwind into the industry fee-bearing capital is rising and it looks like a strong track record of creating shareholder value. Now, just looking at the stock price is tough. You can't just invest because the stock has gone up over the longterm, but real estate and physical assets probably will do good with inflation. I would think also they have all these real estate assets.

If need be, they can sell them, but that's tough. It's not like selling a stock. It's in a liquid market. You need to find a buyer, especially with these huge properties. I mean, there's not that many buyers out there. Low lights, like you guys mentioned, opaque. There was a journalist that said looking at them was like trying to watch a basketball game

with the lights out, which I thought was a good analogy. So that's how I kind of felt trying to learn the business. I got nowhere. Also, rising interest rates make me a bit nervous with leveraged companies and alternative asset managers. Here's a quote from Institutional Investor, which is a magazine that covers stuff like these alternative asset managers. Epstein, which is not Jeffrey. This is Epstein. Epstein said institutional investors have been drawn to higher yielding asset classes like private equity as a result of low interest rates and monetary intervention, which have

made the benchmark yield curve consistently low over the past few years. Lower yields have also prompted higher use leverage to increase portfolio returns. So that may be reversing. And that's just a low light for me. If interest rates rise significantly relative to where they have been over the past decade, what does that do? Well, yeah, I have no idea. But in the short time that interest rates have been rising, this has been the place to be and not. Sure, sure, sure. I guess they don't have daily marks. the real estate look the real estate prices are going to go down if real if interest rates rise significantly that's a fact yeah but i don't know are they disposing of them

i don't know or is it just they're leasing them oh i think there's a mix of both all right bold case brad what do you think yeah i i think so um others pain is their gain that that is that is the bull case so brad you alluded to this i mean the last uh however you could say last decade has been extremely easy in terms of uh m&a landscape and in terms of uh cash flowing and in terms of just very very easy money and and this company doesn't need easy money in order to to survive in order to thrive. And now that that's gone away, I think this will take out a lot of the competition that they're dealing with in terms of the M&A landscape. And it's going to open the door for them to do a lot more and for them to kind of bolster that already

really impressive, would you say 29% earnings compounding for the last few years, Ryan? I mean, that's already fantastic. And I think they've got a lot of wiggle room to do a lot more thanks to, and this is weird to say, and unfortunate for pretty much anyone else, but thanks to kind of this this tumultuous tumultuous macroeconomic backdrop that was hard to say but yep yeah and yeah as long as they're it seems like they have that brand and the investors trust them as long as their lps trust them they'll have a longer runway to invest in stuff and say a public market investor who has seen maybe stuff you know collapse or i don't know you know they just most likely giving that they're in the privates and they don't get the daily marks

and all that stuff, they'll hopefully have a longer runway to execute on the strategy. And given their track record compared to any other alternative asset manager who maybe started up 10 years ago, that may give them advantage as well. Ryan, what are your thoughts? I think the bull case is pretty straightforward, I guess. They continue to increase their AUM base, and they're able to generate their stated target of 12% to 15% returns. Some, I guess, maybe short-term potential upside scenarios is if the asset management

spinoff creates some value, and then if the reinsurance business grows, if they're able to kind of have success with that whole process, I think that would be a lot of upside for shareholders. Yeah. All right. Mine is simple. More fees, more carried interest. And carried interest is just those, okay, I'm going to get it wrong, but it's just,

say performance fees earned that they haven't realized from their investor funds. So that's kind of those, I don't know. It's just like the performance fees. So the management fees are what they're getting in say, I don't know that 2%, 1%, whatever it is. I think it's like their average is 0.9%. But yeah, more fees, more carried interest, and then more gains from asset sales. That's the name of the game here. And just managing the liquidity. If their AUM grows and they don't make bad decisions, things will be fine.

All right. Bear case, Brad. Yeah. So the black box of, of, of asset management and ownership, um, this is very general and in a very general bear case assumption, but the lack of understanding, um, that clearly we all have for this company and clearly what everyone has for this company, um, kind of manifests itself in, um, I don't want to say complacency or negligence, but just, um, but just maybe some off balance sheet arrangements that are a little shady and maybe some other things that pop up and there's no indication of this happening at all. But when you have this little understanding of the inner workings of a company, I think that has to be the bare case of this uncertainty kind of manifests itself in a negative risk

rather than a positive one. Yeah. Yeah. I never like, whenever a company almost intentionally makes things feel complex, I instinctually think they're hiding something. Exactly. Berkshire Hathaway could do that, but they do the opposite and they just weigh it out for you. So why does a BAM do that? I guess the two things I'm afraid of, if I were a shareholder here, one would be that there are assets or there are certain relationships, like maybe relationships is a bad word, arrangements that are under the hood that I can't see that could potentially blow up. And then the second one is that management is self-dealing and I can't tell and potentially taking capital or a disproportionate amount of capital that should potentially belong to

shareholders. I just would have a hard time figuring it out, which means it's difficult for me to be a shareholder. I guess that's foreshadowing into my more or less interested. Yeah, and also the bear case is simple. It's the opposite of what we were saying on the bull case. It's less fees, less carried interest, and less asset losses. That's the name of the game here. The management doesn't do well. It's worth saying that they have done an absolutely tremendous job for shareholders. So we're kind of looking at it with a cynical view, but thus far, it's been remarkable. Yeah. And we do that because that's the point of finding the downside scenarios. It doesn't mean we necessarily believe that's going to happen. It's just kind of trying to do a little scenario plan. They've also, I should mention, bought Oak Tree or a majority stake in Oak Tree management, which is what Howard Marks runs. And that has done really, really well for them.

So another good purchase. So it's interesting. But my bear case, I don't, like you guys said, I don't think anyone actually understands what they are buying, even the insiders. There could be hidden liabilities. I also want to ask the question, what happens if slash when interest rates rise significantly? Does AUM get pulled out of alternatives? Doubtful, at least in the short run. Do real estate prices go down? I think so. And does it become harder to finance LBOs, which is leveraged buyouts? I think almost assuredly. Elon doesn't think so. Sorry, what'd you say, Brad? Elon doesn't think so. full speed oh yeah i'm kidding i'm kidding i'm kidding well once yeah when you leverage

against the best asset in the world uh but i mean that's just the bear cases was the return just interest rates falling and basically leveraging up against that like uh and if that goes in the opposite direction does it become a headwind instead of a tailwind i mean And that's probably my biggest concern here, outside of how it's like watching a basketball game with the lights out. All right. More or less interested, Brad? Yeah, less interested.

And I think it's for the exact same reasons why I think you guys are going to give the answer in 10 seconds. So I'll leave it there. Yeah, less for me. It's just this could easily generate good returns from here. It just won't be with me as a shareholder because I don't understand it. Yeah, less interested. Don't understand it.

Uh, I'd rather invest in one of those, not, not just Berkshire Hathaway, but a Berkshire Hathaway style where you can understand what's under the hood. No, I mean, I'd rather run, I'd rather run Berkshire explicitly over this, um, any day of the week, uh, for the exact same reason that you mentioned with, with transparency and with betting on, um, the goats, but yeah. Yeah. And the returns for the band could be better. Uh, but you know, yeah, you know, don't, I don't know.

That's just not something we're comfortable with. own it. But at least I'll know why my returns are worse with Berkshire. Yeah, exactly. Exactly. All right. Stock for next week or two weeks from now, Brad, what is your choice? Yeah. So there's two companies really high up on my watch list that aren't in the portfolio, but that I'm very interested in owning. One of them is Shopify and we've done an episode on that recently. And the other is Sprout Social, which we have not done an episode on recently. So I think we're going to do some Sprout social action. This is a kind of like a social media marketing channel aggregator and campaign manager. That is my extremely 30,000 foot view. And I have a lot more digging to do,

obviously, but it's interesting. It just had from a quantitative perspective, from a numbers perspective, a very upbeat quarter and sold off. So there are some compelling multiple compression taking place at this point in time. And I think it's a great time to kind of dig in and see if it's compelling. Yeah. I, I kind of took a look at it this week for just, I just happened to be looking at it and it's a, it's an interesting business and it's an interesting concept that I would have thought existed. And I just didn't know who was, who was doing it, but it seems to be Sprout. Yeah. All right. Good tease for next week. Thank you all for listening. Remember we are not financial advisors. Anything we say on the show is not formal advice or recommendation.

Let me hit masterworks again, uh, because I'm worried I did the advertisement wrong. Use masterworks.art.ccm to check out the service. It is a great service. Other disclosure, Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Again, thank you all for listening. We'll see you next time. Thank you.