Q3 2021 Brookfield Asset Management Inc Earnings Call
Good day and thank you for standing by welcome to the Brookfield asset management third quarter 2021 conference call and webcast.
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I'd now like to hand, the conference over to Suzanne Fleming managing partner. Please go ahead.
Thank you operator, and good morning, welcome to Brookfield third quarter 2021 conference call on the call today are Bruce Flatt, Our Chief Executive Officer, Nick Goodman, Our Chief Financial Officer and Joshua.
Growth strategy.
Bruce will start off by giving a business update.
Who will discuss our financial and operating results for the quarter and finally, Josh will give an update on the growth strategy. After our formal remarks, we will turn the call over to the operator and take analyst questions I'd like to remind you that in today's comments.
In responding to questions and then 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 Securities law.
These statements reflect predictions of future events and trends and do not relate to historic events. They are subject to known and unknown risks and future events and results may differ materially from such statements.
For further information on these risks and their potential impact on our company. Please see our filings with the securities regulators in Canada, and the U S and the information available on our website.
I'll turn the call over to Bruce.
Thank you Suzanne and welcome everyone on the call our results for the quarter were excellent.
With distributable earnings of $1 2 billion, taking total earn for the last 12 months to $6 6 billion.
Nick will talk about that later.
During the quarter, we also completed or advanced a number of strategic initiatives across the business.
We monetize numerous mature investments deployed capital into a number of new opportunities and continued with strong.
Fundraising across the board.
I would make an observation, which is that despite the size and scale of the business today.
Our growth potential seems greater than it has ever been.
With our differentiated investment and operating skills skill set we have built five market leading businesses that are positioned around global investment themes with secular tailwind to grow.
This gives us conviction in doubling the size of these businesses over the next five years.
On top of that we are adding new growth strategies for the future insurance solutions technology transition and secondaries and we'll touch on a number of these today.
The low interest rate environment.
We will continue to push allocations of institutions towards alternatives over time, which is positive for our growth trajectory, but also allows us to attract new clients.
By broadening our product offerings across each of our businesses.
Turning to the market environment for just a moment with almost all major markets lifting restrictions we have seen a continued reopening of the global economy.
This has meant strong GDP growth improved labor markets, and a constructive environment for capital markets activity.
Pent up demand continues to be released.
But with disruptions across global most global logistics it had been challenging to match unleash demand.
With supply.
<unk> increase in prices for at least the time being.
We do expect this to stabilize in 2022.
Importantly, despite this the 10 year U S. Treasury note is still hovering around the mid 1% range.
And we expect rates will remain low ish for longer.
This backdrop is a very positive environment for our business given.
Given the nature of real assets and the businesses that we own.
Which generally benefit from economic growth.
And have revenues that are just by contract or with inflation.
As Nick will discuss further investment performance has been very strong and we continue to be active on the monetization front.
<unk> 42 billion in proceeds over the last 12 months.
This has allowed us to surpass the preferred hurdle in our early vintage funds and we now have at least one flagship fund across each of our businesses realizing carried interest.
All monetization within these funds going forward will drive further carried interest all of which has been accumulating for years.
Valuations in many areas are high.
But I would note for you that many are not.
This includes numerous non U S markets.
Just giving an example, India, China, South America, as well as some sectors like midstream pipeline.
In addition, we are able to leverage our deep operating capabilities, our flexible capital our global scale to find opportunities to deploy that capital for value even in growth sectors.
Some examples of the investments recently made include our closing of the inter pipeline transaction and our infrastructure business and the agreement to acquire a stake in first energy transmission, both within our various infrastructure funds.
Our $6 billion deal to acquire scientific games, and our private equity business and.
A number of real estate renewable power and credit investments.
Over the last 12 months, we have invested or committed over $60 billion of capital.
On the other side fundraising activities have been extremely strong from both the flagship perspective.
But as important with respect to our new product offerings.
Since the end of last quarter.
Note it in our release, we raised $34 billion of capital across our various flagship funds, but also complementary strategies.
We currently have four out of five flagships in the market and are on track to reach our $100 billion target for this round of flagship fundraising and maybe even surpass it.
Our flagship fund is our flagship infrastructure fund is also expected to launch fundraising early next year.
Efforts in the quarter include raising $9 billion for the flagship real estate Fund 7 billion for the close of our transition fund the founders close of the transition fund and.
And demand remains strong for these offerings and we expect to close additional amounts of capital in the coming months.
We have been advancing our new strategies and product offerings all while.
Continuing to scale our existing businesses.
Our insurance solutions business, which we spoke at our Investor day is progressing well and growing quickly. The business has recently closed two large block insurance deals for a total of $12 billion of long dated annuities.
And we're now redeploying this capital across a variety of investment strategies, including a number of our oaktree credit strategies and our Brookfield credit funds.
The addition of American National group to the business, which is expected to close in the first half of 'twenty two will provide us with an insurance platform from.
From which to grow our presence in the U S market.
We completed the transition to become the advisor Brookfield REIT public non listed real estate investment Trust last week, which will help us enhance our footprint across the private wealth channel and should attract new investors in the private wealth space.
This product is an income oriented investment strategy.
And we will invest in high quality stabilized assets.
That we specialized in for many decades.
With three newly contributed investment assets from Brookfield to the portfolio. The total value of Brookfield REIT has more than doubled since our purchase to a $1 billion and we are just getting started.
We have also been active with our growth technology strategy and we held the final close for our second fund for.
For over $500 million this week.
Josh rally managing partner and head of growth strategy as Suzanne mentioned is here with us today and he's going to talk about that.
As usual we have a lot on the go. Thank you all for your support.
And I'll hand, it over to Nick.
No.
Thank you Bruce and good morning, everyone.
As Bruce mentioned, our financial performance in the quarter was very strong we recorded $1 $2 billion or 77, a share of distributable earnings or de operating <unk> of $934 million and.
Our net income of $2 $7 billion.
The total <unk> generated over the last 12 months is $6 6 billion or $4 23, a share and that is double the prior 12 month period.
The key drivers of the performance are threefold one growth in fee related earnings supported by successful fundraising.
Carried interest realization underpinned by strong investment performance and monetization activity.
Three stable and growing cash returns on our principal investments.
So starting with fee related earnings. We currently have four of our five flagship funds and active fundraising and have a further 25 funds in adjacent strategies also currently in the market.
Inflows since the end of the second quarter totaled $34 billion.
Which includes a strong first close for our fourth flagship real estate fund the fenders close for a global transition fund and inflows that are real estate secondaries strategy insurance solutions business and across other real estate infrastructure private equity and credit funds.
Our fee bearing capital increased by $16 billion to $341 billion at quarter end and Thats, an increase of $52 billion over the last 12 months.
This has led to strong growth in Cedar related earnings, which were $451 million for the three months period and totaled $1 8 billion over the last 12 months, an increase of 25% from the prior period.
We expect our fee earnings to continue to grow in the fourth quarter as we raise more capital and received the incremental fee benefit from fund raise funds raised during and subsequent to the third quarter.
In addition to the current management fee base, we have $35 billion of additional committed capital that will become fee bearing once invested <unk>.
Relating to approximately $350 million of incremental annual fee revenues.
We maintain our conviction that this next series of flagship fundraising combined with growth in complementary products will lead to a step change in our asset management earnings and allowed us to double the earnings power of our franchise over the next five years.
Moving on to investment performance of monetization activity, we continued to execute on a number of capital recycling initiatives during the quarter, we realized over $8 billion of proceeds returning $7 billion to our clients on the back of this realization activity we generated 223.
A disposition gains from principal investments and $304 million of realized carried interest.
Over the last 12 months, we have no realized approximately $1 $8 billion of gross carried interest compared to $482 million.
In the prior year period.
Our investments performed very well across all of our managed funds we generated around $1 billion of unrealized carried interest in the quarter, increasing the tool to accumulated carried interest by 16% to $6 9 billion.
We expect to recognize this into income overtime as we continued to execute on asset sales.
And lastly, our principal investments continued to provide strong and steady contributions to our distributable earnings this quarter distributions from our investments were $572 million up 19.
14% from the prior year.
The increase was driven primarily by the privatization of <unk> as well as higher distributions from our public infrastructure and renewable vehicles.
Funds from operations or <unk> before realizations increased 10% since the prior quarter. The increase was largely driven by the continued growth of our asset management franchise as well as a higher contribution from our real estate business generally privatization of BP Y and equipping realizations <unk> grew by 30.
86% to $1 $4 billion.
Our liquidity continues to remain very strong in addition to $66 billion of Uncalled fund commitments, we have approximately $14 billion of core liquidity, including close to $5 billion directly at the bottom level. All of this adds to a total of $80 billion of deployable capital.
During the quarter, we continued to advance our green financing initiatives by issuing $600 million of Green bonds. Due in 2032, and we also published our inaugural Green Bond in preferred Securities framework, which is available on our website.
Proceeds from the green bonds will be allocated to eligible green investments as outlined by our framework.
Our balance sheet remains conservatively capitalized with 94% of our debt having no recourse to the corporation.
Debt to market capitalization ratio of 11%.
With $5 billion of core liquidity $65 billion of investments and $3 $6 billion of annual distributable earnings before realizations, we retained significant core financial strength.
To pursue strategic growth or to buy back shares.
Before I hand, the call over to Josh I am pleased to confirm that our board of directors has declared a <unk> 13 per share dividend payable at the end of December Josh.
Great.
Thank you Nick and good morning, everyone.
I am pleased to be here with you today to provide an update on our technology and growth investing initiative that we've been patiently building since 2016.
Over these last five years, it's developed into a meaningful business for Brookfield that we will continue to scale over time, having deployed over $1 billion into portfolio into a portfolio of technology and growth stage companies that are building solutions to transform mission critical industries, where Brookfield has decades of experience as an owner and operator.
Real estate infrastructure power and the many sectors, where our private equity and credit businesses operate gives us a unique opportunity to be advantaged by these changes as both adopter and investor.
As a backdrop to Brookfield growth partners enterprises everywhere are increasingly turning to innovation as a means to increase productivity grow profitability and build competitive differentiation.
Brookfield is no exception and as highlighted last month during our Investor day technology adoption and investing is increasingly come to focus across all of our business lines.
These trends were accelerated during the pandemic when digital solutions went from a nice to have to a must have.
The core of the economic economies resiliency and accelerating recovery.
Many of our operating companies experienced exponential growth and corresponding enterprise value enhancement.
What's most exciting is that this was a catalyst moment for the intersection of real assets and innovation.
We believe that this growing momentum will create an immense investment opportunities for growth and technology investors and an exciting opportunity for investment.
With the accelerating macro Brookfield growth partners was built on two guiding principles first our long institutional history of owning assets and operating businesses creates a unique vantage point and <unk>.
Identifying and asked accessing world class technology companies.
Fully understand the pain points technology businesses operating in our core sectors are looking to solve and therefore understand which opportunities can help resolve these.
Second when we provide capital to these companies and coupled them with access to Brookfield ecosystem as a means of value creation and creates a structural advantage that blocking a generalist growth equity investing.
We create enterprise value and the companies, we partner with his customer channel or validation capital.
Enterprise value enhancement improves our returns and significantly de risks our investments.
These foundational principles have created a great start for our business channeling, our many decades of experience and a thoughtful approach to investing into the technology enablement of the built environment.
The enterprise value enhancement that Brookfield provides touches every part of the investment process.
<unk> underwriting portfolio management and exit.
In sourcing we leverage Brookfield group of 150000 operating employees to discerned skilled in global investment teams that touch the $650 billion of assets and the hundreds of operating companies that we control.
Those thematic statements turned into outbound and proactive approach to proprietary investment processes in which we partner with our Brookfield operating employees, who bring their industry experts to expertise alongside her diligence with a lens of being an actual user.
As an underwriter.
No other growth investors have we.
We can get our operating companies within Brookfield to pilot technologies, and getting real and non diluted feedback to mitigate technology risk and enhanced execution capability there.
Significantly differentiates our capital as customer advocate and ensures we are able to price risk.
As a manager and steward of capital for our Lps, we can steer product development and organic growth strategies.
Source inorganic acquisitions to maximize top line performance.
Below the top line, we were able to leverage best practice, Brookfield deep operational bench strength and use the same value creation playbook, we pride ourselves on is it asset manager to help the drug companies partner with grow and scale.
The $1 billion of investment across multiple funds hold interest in privately held gross stage software and enterprise technology companies that are growing revenues at 30% plus on average year on year.
In many cases, our early growth companies grow well in excess of 100% year over year for our core growth companies are those closer to a monetization event and stabilized cash flows grow 30% to 50% or something.
We focus on companies that have been significantly derisked.
Proven technologies are market leaders with durable competitive moats.
<unk> contracted or heavily recurring revenue streams and our most importantly are generating very attractive unit economics that are repeatable at scale.
Lastly, and most importantly believe that our ability to leverage our operating expertise and embedded customer base further accretive downside protections that are critical for our franchise to succeed.
While it's still early innings, we've had two full realizations have barra portfolio is significantly has had significant valuation gains from third parties and the track record is performing well ahead of plan in line with Brookfield compound growth rate.
Behind the $1 billion of investments with a dedicated team we have reviewed over $50 billion of actionable proprietary opportunities made up of thousands of businesses that'd be monitor constantly.
Our diligent and pragmatic business building has created a canvas for a much greater scale.
Within the growth vertical, but also in mature more mature forms of investing.
Our investors should expect to hear more about our technology related investing activities over the coming years and many of our business units and in particular within our private equity group.
We will continue to build a durable and differentiated business and technology investing that finds value across all parts of the companys lifecycle as a scaled partner.
For today's call we thought it would be helpful to highlight two investments represented up our approach to this sector and asset class.
First as a business we invested in 2018 called latch.
A public company that make her a smart lock and digital access control software for residential applications in the United States.
This investment was a result of many years of close work with our multifamily operating employees, we're looking for ways in which technology could enhance net operating income either as an amenity driver great driving greater revenue or as an efficiency driver to reduce costs.
<unk> serve bolt.
They are highly visible and desired for tenants and also solve some significant management challenges for problems such as managing restaurant access offering remote showings and package and delivery management.
These newsletters our group to seek technology first vendors that design, both hardware and software to create new means of access.
It out amongst a long list of legacy providers that isn't disrupted startup quickly gaining market share in the multifamily sector.
We combined our commercial and capital efforts to lead the company's $50 million gross round in 2018, joining the board in conventionally agreed to purchase several thousand latch units for our multifamily portfolio.
This created a step function in growth and to our ability to adopt technology in our own assets to Brookfield involvement in the earlier stage business can create significant competitive advantages long term.
And that's exactly what happened.
And through the course of the following three years, the company's annual bookings grew tenfold, which drove significant sales growth and eventual public listing earlier this year.
The equity valuation of last during this time of increased several times from our initial entry price, creating a strong return on our investment and further solidified our thesis Brookfield ecosystem can accelerate trajectory of growth stage technology companies and drive returns for investors.
Another example is our recent investment in the residential solar market through a partnership with a company called good leap.
The largest digital first solar loan originator in the United States.
Cros are renewables properties and infrastructure businesses, we have seen firsthand the growth in solar adoption.
Residential solar is of particular interest and continues to be a fast growing end market that we had Brookfield has been involved with for many years.
Good we created software ecosystem for homeowners to access low cost financing anything to purchasing and installing solar.
8000 contractors or standardize on good lease technology for proprietary origination.
Good Leap also created software for working with the capital markets at scale.
The business has grown to the number one financing partner in the United States of solar and is quickly building share and storage and other forms of energy efficiency.
The financial profile is just as exciting growing well at north of 50%, while being tremendously cash flow positive.
This has led to an already significant multiple on our invested capital country year since investing.
These two examples are just many in our portfolio.
Many in our portfolio today represent our unique approach to growth equity.
We have designed this program by leveraging our core values of staying disciplined patient and constantly seeking opportunities, where we are differentiated value added capital partner.
And because of our scale balance sheet and $650 billion of assets around the world, we've been able to access some of the highest quality technologies in the world technology companies in the World and we expect that this will continue at a larger scale in the future.
This access is leading to a very strong start for our growth equity business. Thank.
Thank you all for your time and I'll turn the call back over to the operator for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Then that is star then one if you'd like to ask a question at this time.
Please standby, while we compile the Q&A roster.
Our first question comes from Alex <unk> with Goldman Sachs.
Hey, Thanks, good morning, Thanks for taking the question.
So maybe taking a little bit of a step back lots of moving pieces in the quarter with reporting changes and whatnot, but.
When I think about third party capital between privatization of BP Y and the insurance build out there are a lot of entities that Bam now essentially owns 100% of on balance sheet.
But that are under your reporting convention pay a fee to Bam as well so.
I think it would be helpful. Just to say out of the $341 billion of fee bearing capital that you guys report how much of that fee bearing is ultimately related to entities that Bam owns mostly on balance sheet. So call. It 90 plus percent ownership.
To kind of help us set the stage a little bit.
Okay.
Hey, Alex Yes, listen I mean insurance is just getting started and I think.
Listen we've been through this in the past and we do footnote in our materials its around $50 billion and comes from those entities, but I think you know.
We've talked about this distributable earnings being the focus the focus is really on the free cash flow generation from our businesses and the cash that we are earning and is generating a really strong return on capital and so the distributable earnings I mean, if the cash is paid off as distributions are management piece is still cash that we are earning on a perpetual capital base its very high quality.
The cash flow and it's reflective of market rates for those management fees. So the answer's 50, and but I'm not sure when we think of it in that differentiated manner.
Got it thanks, and then some of the strategic initiatives you guys highlighted maybe we can start with Brooke.
Brookfield read launch here in the fourth quarter.
Can you help us I guess, what would the NAV and what would you ultimately move into that vehicle from Oaktree talked.
Talk to us a little bit about your distribution plans sort of what are the platforms that are your own now kind of what are you doing with the wire houses are you on.
The warehouse platforms today, and if you kind of think about the opportunity set for brokerage bleed over the next six months to 12 months. What are you guys shooting for in terms of the monthly inflow opportunity set.
Yeah sure Alex I can I can start on that one so we transferred about $1 billion of assets into the vehicle at the start so that's the size of the entity today.
I'm really just taking a step back.
And we've talked about.
Combining our wealth solutions platform that was previously in three different spots in the business and we put it together with oaktree to create virtual oaktree, well Brookfield Oaktree well solutions that should have tremendous reach it as about 60 professionals today and is working with all of the major banks with wealth retail networks with various products.
So we think this will provide tremendous leverage to our business and tremendous scale and from the retail channel overtime and were developing and advancing products product specifically for that channel. The non traded REIT being one of them and I think if you just think about this specifically we've transferred it to Brookfield, whereas you know we are one of the.
The largest real estate managers and investors in the world and the scale and the scope of our business is really unrivaled and if you think of it everything else that we do in our business around real estate.
Our scale and potential of the offering that we have is really tremendous and we think it will really appeal to investors and to banks to get it onto the platform.
We have really really high hopes how much that will be will tell but we know theres significant capital in the retail channel looking for product like this and really we have something that's unrivaled in the space.
Great. Thanks, Nick and then if I could just squeeze in one more around the capital return dynamic I think over the last couple of quarters.
We talked about the opportunity you see for share repurchases.
Given the fact that you guys are generating a lot more cash flow in the business, which seems to be.
So its certainly only increasing from here given the outlook for carried interest and things like that so.
When we look at the fully diluted share count obviously, there are some deals.
That drove that higher over the last few quarters.
The path from here should we expect you guys to be a lot more aggressive to actually drive the total share count down over the next 12 to 24 months.
Or is the goal to maybe be a little more gradual and keep it flattish.
Yeah, I mean listen this dependent its capital allocation opportunities right now we have really really good opportunities to reinvest that capital back into the business as we mentioned things like buying an insurance platform in the U S. But you are right.
Carey continues to pick up on the business is growing to the free cash flow is just compounding and growing every single year and it will grow again and from here. So there will be excess cash flow and the plan is to buy back shares and I think we've stated in the past we do plan over time to retire the shares that were issued recently.
Our recent acquisitions and so whether it's one two or in the next three to five years that that is the intention.
Great. Thanks, I'll hop back in the queue.
Yeah.
Our.
Next question comes from Ken Worthington with JP Morgan.
Hi, good morning, Thanks for taking the questions.
It looks like the fund raising and the perpetual fund stepped up this quarter.
And it could suggest that something has changed cause the marketing of the flagship products be driving more interest in these perpetual funds rather than the other option, which would be to crowd out those investments and do you have any insights on the stronger level of these non flagship fund fundraising this quarter and maybe how the emergence.
Some COVID-19 related travel restrictions could be influencing these fund sales.
Yes, Thanks, Kevin that's a great question I actually believe that what we are doing with the flagships and the complementary strategies. It is tremendously additive highly highly additive to the franchise because we're in front of our clients talking to them with multiple products and they have different.
Tools of capital with different risk appetite different requirement for value versus yield and growth and so I think it's very very additive that we can have a number of active conversations and with our peers and I think.
We launched some of our perpetual.
Vehicles over the last few years and they've been building scale and now they are really really delivering both in terms of deal flow and conversations around fundraising and they are able to attract new clients to to the business and then cross sell into even our flagship so I think that it's all very additive and in the quarter Big contributors would have been.
In infrastructure, a perpetual vehicle or public vehicle in infrastructure issued securities, which were very well subscribed and so that was a major contributor into the quarter, but just generally and there is tremendous momentum now around this area for us.
Okay. Thank you.
Then.
I think you mentioned at least one flagship fund in each category is in carry.
The call it $6 9 billion of accrued carry how much is in funds that are.
We're ready to take cash carry at this point.
We're building we're building towards that I think in our material, we do talk about what could be realized.
Over the next few years.
It was two to 3 billion over the next three to five years, but thats really based on pace of sales and asset sales and in the market that we're in some of that could be accelerated but it's our early vintage funds. Our first real estate fund our first infrastructure fund on our fourth which was our biggest our first large scale private equity funds are still <unk>.
<unk> assets and still realizing carry and then there was mixed vintage funds as we monetize will move towards that preferred return and be able to start realizing so I think we laid out what it will be in the next five years, but I.
I would say that we're tracking really well against those numbers.
Great. Thank you very much.
Our next question comes from Sohrab <unk> with BMO.
Yes.
Thank you very much two questions first one on private credit I think you've highlighted.
In the shareholder letter that it is.
Much of growth.
You may be at the expense of commercial banks.
And the like I guess, if you could just.
Provide some quantification as to.
What sort of growth youre expecting from that over the next call. It five years.
And what will that do to do overall dynamics of the fee rate.
Fee margins and they like it.
At the broader Brookfield level. So that's question number one and then.
The second one around stagflation please.
So I'll, maybe just it's Bruce I'll take.
The first one and just say that the.
Uh huh.
Okay.
Nick.
I just first I'd just say the classic.
Rob can you state the question again.
Yeah, I just wanted to get a bit more maybe color around the private credit opportunity that you'd.
You've highlighted.
In the shareholder letter just to kind of get a bit of cash.
<unk> around it over the next five years and what sort of implications will that have to your broader.
Call it kind of standardized ratios that we look at whether it's the.
You know call it margins and.
Fee related.
Our margins and kind of like I got it. So first I'd say on the private credit side I don't think it's taking any thing from the banks, what's happening globally is that institutional clients used to have large sums of money invested in the fixed income instruments.
And are they werent. These these werent.
Competing with the banks that they were buying government securities and they earn for a 5% owning a government security or six or eight historically.
Today, they can't put that money into government securities and earn a reasonable return.
The private credit is widening out so the bank still or are doing what they do and participate in the business what they do but what's happening is there's a.
The amount of money coming into the sector.
That needs to be deployed is dramatically increasing in some of that.
May go to products in the liquid markets issued by the bank, but a lot of it is is in the private market and its just finding opportunities to put money to work privately that we're doing for these institutions and so it's really sub planting.
Fixed income from government securities in their portfolios.
I think the second part of your question, it's just too to margins and what does it do and of course, if you're investing at lower returns you can't charge as much to your clients and therefore and I wouldn't think of it as a.
The margins, we have is an amalgam of a whole bunch of things some highly.
Profitable things that we do which pay us very very high margins, but we earn a lot for our clients to do that and then some things that pay a small amount because our lower amounts.
The returns for them are left and.
So I'd say the.
Our our margins overall are will be lower if we drive more into credit having said that we don't look at it that way, it's just an amalgam of highly profitable businesses each on their own.
Thank you Bruce if I could just have a quick follow up on that.
So just on the private credit you wouldn't you wouldn't broadly quantify this as.
Our regulatory arbitrage that.
Governs to banks or maybe excludes the banks from doing certain things you view this as just private credit.
You have access to.
I guess as a yield play, but not so much on a regulatory arbitrage or is that is that the right way to think about it yes, and I would just say we were we have the ability to put money at work in different places around our businesses, which is just different and a lot of our money is mezzanine money.
As opposed to first lien money and and we look at it it's investing senior to the equity we'd otherwise buy.
So a lot of it is I'll call it lower.
Lower than first lien, which is mostly what the banks are doing.
Okay. Thank you and I had a second question just around the topic of stagflation, it's getting a little bit more airtime maybe.
And I just wanted to get your thoughts maybe Bruce if you could just talk out loud for us what how you as a management team think about the topic of stagflation. If it's if it's viewed as a tail risk event and whether or not.
Theres any any actions you could take.
In advance to inoculate I guess some of it if you related or any growth expectations.
Okay, we're not experts in macro finance.
But I'll just tell you with our.
Thinking is.
Essentially it is that.
And the things that we do which are real assets and businesses around real assets and and and the type of things we do essentially produce.
Growing streams of cash flow over long periods of time.
You can debate each business or type, but that's essentially what they do and those type of businesses are really really good in a low interest rate environment and and and when there is some inflation that's even that's even better for the businesses because it means by contract, they're going up or inflation helps the contracts go up a little bit.
If theyre not strictly contractual so I'd say just generally this environments are highly positive environment for four.
Our our businesses now.
The only thing that could happen is that you don't have any growth and then you have inflation and that's generally bad for countries GDP.
For countries and I, just don't think that's going to happen.
It will happen in some countries of the world There is no doubt, but in the major but let's call. It I think you were talking mostly about the United States, everyone worries about the thing of the day that everyone.
Is commenting on.
And.
Theres no doubt prices are higher and there's no doubt that there.
There are issues of supply chain, but a lot of this is caused by the fact that we shut down the economy for 12 months and to restart the economy. It takes a lot of work and we can just see it in our businesses. It just takes time to get people back to the manufacturing facilities. It takes time to hire.
Your people it takes time to get logistics properly back into place and once that occurs I think youre going to see.
All of this settled down it just takes time.
Thank you very much for taking my questions.
Our next question comes from Cherilyn Radbourne with TD Securities.
Thanks, very much and good morning.
We've had some questions from investors on recent developments in the real estate market in China. So maybe you could give your perspective on what's going on there and whether the outcome may be opportunities for Brookfield over time.
Yeah. So look all of our business in China is small relative to our real estate business in China is small relative to the global business business, we have in real estate, but I can tell you by.
Just a I guess evidence of our business. There is that people are still renting space.
People are still buying goods.
And things are pretty good in the in the market in general I would say what.
What gets the headlines is the Chinese real estate has an issue, but really what it is it's the residential developers that built we're building condos had significant amounts of leverage in the companies and that is unwinding itself given what's going on in the country.
They say real estate, but really what's the.
Ah.
Really what the focus is on is the residential condominium developers and.
All the types of cities tier 123 and in China.
So I think as that unwind theres less capital and what's going on given what's going on in China, Theres less capital in the country and to your second part of the question, which is does that lead to opportunity and it has it will and I think.
Continuously continuing there will be more opportunity in China at more of a value basis than you've seen for many many years.
Great. That's helpful Second one is for Nick.
Terms of the 35 billion of committed capital that will generate fees. Once it's deployed can you remind us which pools of fee bearing capital generate fees on committed capital versus fees on deployment.
I assume that that $35 billion gets deployed relatively evenly over the next three years or is there.
Cadence might be different than that.
Yes, sure Cheryl and thanks.
So our flagship funds.
Across real estate infra.
Infrastructure transition private equity earned fees on committed capital our flagship opportunities fund.
<unk> credit.
Is capital on its fees on invested so thats a large component that is a large fund and so as that capital is highly committed right now, but it's a lower level of actually invested or deployed so as that gets deployed.
That would increase fee bearing capital fairly short order given the level thats actually commit to today and the rest is just across sort of our perpetual long dated offerings.
Other credit products that will just gradually get deployed over time, so it's probably not too long and then we've got some flagship funds and their investment periods and they have some capital set aside for follow on investments that will get deployed over the next five years, So theres, probably some frontloading to it and some will be evenly over the next few years.
Great. Thank.
Thank you. Thank you.
Our next question comes from Bill Katz with Citigroup.
Okay. Thank you always say the question.
Just on the fundraising your commentary that you had sort of 30, some odd billion of sales since the second quarter and so give you had about $20 billion in your disclosure I'm presuming some of that spilled into the fourth quarters. When if you can maybe talk to where you're seeing that growth and then if you could tie it to your car.
Commentary that you think you could exceed 100 billion in this flagship funds where that upside might Saturday.
Yes, yes, that's right. So I think it was about 24 billion in the quarter 10 billion. That's happened subsequent to quarter end.
Before release.
And I would say that right now the fundraising is strong across across the spectrum, we really laid that out as per said the amount of capital that is seeking to be invested into alternatives across the risk spectrum, others are opportunistic although it through to our core and then into our debt funds. The appetite is just incredibly strong.
And so I think if you look at the flagship funds, which is worth 100 is focused on.
<unk> is done now at $15 90, offset was very successful.
We are seeing that we've had.
First unfunded closed for real estate and <unk>.
<unk>, respectively, and the appetite is really well I think that speaks to the flows of capital, but it also speaks to.
The product offering on the franchise and investment track record and opportunities that we present in for a first time fund in renewables and transition investing again it talks to the really really unique proposition that we have in that space.
The momentum around that space and the product that we can offer to our clients to help them with their ambitions around net zero is really unrivaled. So I think it's just strong across the board.
Okay. Thank you and just my follow ups a bit of a two part so I apologize first I appreciate all the extra disclosure is there a way to think about the segment accounting by the major bucket real estate credit private equity et cetera, Youre, giving revenues.
But what I'm trying to see if I could tie it back to the FRE margin opportunity as those platform scale.
And then separately I am sorry to go over this one again, but can you unpack the sequential change of BP Y internalizing it sort of what came out of the invested capital side and what sort of came through on the <unk> side, just trying to understand the sequential changes in those lines. Thank you.
On the on the breakdown by fees.
So over time, maybe we will look to introduce the cost and give your margins by business, but the scale of opportunity is really relative to the size of the business as they scale up you should see that operational leverage come through in the numbers, but over time, we can we can help that break that out for you.
On your question around capital I think the fees is consistent with what we laid out the <unk> business itself is being fees on its core and transitional and development assets and Thats the basis points on up fee rate consistent with what we'd see for are more like our perpetual private real estate funds and then their investments into <unk>.
The funds would be earning the fees. The offset is went away that the growth is there is no different but just the offset doesn't exist anymore and that capital flows through the private fund side or the <unk>.
Fee splits for the private equity side.
Okay. Thank you.
Thanks.
Our next question comes from Mario <unk> with Scotiabank.
Alright, Thank you and good morning.
Lucy may have been five or seven years ago.
Highlighted yesterday right, Jim I can't remember, which one it was.
Sure it could be Brookfield sports vertical.
Once in 10 years.
<unk> already provided some five year growth forecast so at your Investor day.
Talked about recycling capital out of real estate.
In particular, but if we look out over the next 10 15 years and keeping in mind some of the new growth vehicles.
No.
How do you think about that answer relative before something is wrong.
Yeah.
Don't know here's what I would say real estate is going to continue to grow but it's a vast business today. So it just can't it can't quadruple in size.
But it can continue to grow infrastructure will get bigger and bigger.
Our renewables.
Is growing.
And transition are growing fast, but there.
It's a limited it's one business, it's not 10 businesses like each of those other ones have.
Private equity will be getting bigger insurance.
If interest rates stay low our insurance solutions business could get very large in size of it in terms of size of AUM.
And I think the.
The wildcard here is how successful we are in.
And transitioning the business with what Josh was talking about being able to.
<unk> are investing into later stage technology businesses, and our private equity area and I think that could become large because to.
Just in the last five years that's become.
Business for buyouts, and it will increasingly become that as opposed to just a venture and growth business at it.
Become very significant.
Great. Thank you and I guess my second question.
As it relates to the capital intensity on the balance sheet.
On the E.
Cash flow from perpetual affiliates was 15% of the deed before realizations this quarter.
Clearly laid out the strategic benefits.
Capital on the balance sheet.
Paul.
Important to the partnerships that being said when you look out over time are there any.
More of a macro factors, whether it's valuation interest rates and so on.
How do you reconsider what you seem to be the optimal capital intensity on the balance sheet given.
Your expectation.
Earnings grew over 20%.
Sure.
Yes look I would just say.
And we are.
As all of everybody on the line that's interested in Brookfield would observe the fastest growing business. We have for past 20 years and probably the next 20 years has been our investment management business, there's no doubt it grows.
Spectacular rate.
Like others that are out there in fact ours, probably grows faster and the reason it grows faster as we have.
Access to capital that virtually nobody else has access to it differentiates our strategy for our clients it differentiates our ability to make money for them and while on the face of it.
It looks like it earns a lower return it is the reason our clients come to us and the reason why we can earn the earn the returns that are shown in the shareholder letter.
We have for our clients and I'd say it just continue.
I guess, our view is yes, it does or in a lower return, but our business is special because of it and in the fullness of time it doesn't matter.
Whether it is still early 16.
One earns a lot more.
But on balance it contributes very significant to us. So that's not to say that over time, we won't take capital off.
And use it to buy back shares we will.
But having a differentiated offering.
To be able to make us different than many others is is a special thing that we have and we're not going to give that up ever.
Okay. It makes sense and if I may just one really quick other one on the corporate liquidity.
$5 2 billion at quarter end.
There's been a lot of activity recently, where would that stand mostly today.
Probably it's probably consistent Mario there's there is influencing some outflows, but it's broadly consistent than what you would've seen at the end of the quarter.
Perfect. Okay. Thank you.
Our next question comes from Robert Lee with <unk>.
Great. Good morning, Thanks for taking my questions I was just curious maybe focusing on.
Secondaries business, maybe a little bit on direct lending but.
You've highlighted both of them in the letter as being opportunities in places for growth I mean, if you look at the secondaries business, you've raised some money for real estate secondaries, but in the marketplace you've seen.
A fair number of actually large properties secondaries managers trade.
Who are arguably already at scale. So can you talk about.
Kind of your interest or willingness to kind of accelerate growth.
Or at least your secondaries initiatives.
Through M&A and then I guess on direct lending, obviously oaktree has that capability, but again in that kind of specifics leave of private credit.
Many larger competitors I mean, I mean do you see.
Again, you see a need to excel.
Accelerate your scale or size in the direct lending business through M&A as a possible Avenue.
So that's my question.
Yes.
Thanks, Rob Yeah listen there are good questions I think.
The secondaries business is that you are seeing trading.
Trading in the market.
It may be slightly different to what we're looking to do and I think if we look at secondary and direct lending.
Intentions right now are to build these organically because we see secondaries as an extension of what we're already doing in our business, but it's just a new product that we can offer our clients and an extension of our existing capabilities as to board as opposed to building a dedicated business and I think we've already seen very very early.
Success in that regard in real estate before we even started to launch the first fund, but our brand our reputation and the view of having us as a partner and more and more and more of the GP led secondaries space. We think is differentiated and really leans on our business and is not something that we need to acquire externally. So the intention right now.
And there is to build that organically and I would draw the exact same argument on the Oaktree site that while it may not be at the scale of others. We have all the expertise internally and therefore, we believe with the relationships and the reputation that we have in that credit space that as we turn our minds to it we can skilled out organically.
Great and then maybe a follow up just on this as it relates to Oaktree. So I'm just curious I mean their flagship fund you mentioned kind of getting close to the finished ending its fund raising but it's also 70% invested.
And since typically you saw raising the next a next fund when they get to that 75% or so.
Is.
Should we expect that there actually could be another fund kind of quickly coming to market or do they have recycling capacity in that fund. So that's still going to be maybe a couple of years before you start the next flagship fund at Oaktree.
And then I guess.
When we get to 'twenty two that's the first.
First opportunity to buy in some additional <unk>.
Piece of Oaktree I believe if I'm not mistaken. So can you just remind us of.
When that could be in.
The potential terms around that.
Sure so on the on the first part.
Rob on the first part I'm, just trying to I'm, sorry, I'm just trying to remember the question. Yes. Your second part of the question answered. If you do have recycling capacity in that fund so while they're at 70% today, it's a bit different to our flagship funds. So it would be sort of immediate fundraising in the next few months, but it may not also.
B as far as two years, it could be sooner than that but that depends on the recycling.
On the investment nature, but they do have that capacity.
Capacity on the Oaktree liquidity mechanic just to remind you. It's a put option that they have not a call option on that.
Kind of the guardrails around our I think when we did this it was 13 five times three year trailing fee revenue and six and three quarters times and the carry that's the mechanic around and there are limits around how much can be monetized in any one year and this is really their right to put it to us if they so choose.
Yes.
Great. Thanks, so much for taking my questions.
That concludes today's question and answer session I would like to turn the call back to Suzanne Fleming for closing remarks.
And with that we will end today's call. Thank you everyone for joining us.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Okay.
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