Q2 2023 Brookfield Asset Management Earnings Call
Yeah.
Hello, and welcome to the Brookfield Asset Management Ltd, second quarter 2023 conference call and webcast. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
Now I'd like to hand, the conference call over to our first speaker Ms. Suzanne Fleming managing partner. Please go ahead.
Thank you operator, and good morning, welcome to Brookfield asset management second quarter 2023 conference call.
On the call today are Bruce Flatt, our Chief Executive Officer, Conor Tusky, President of Brookfield asset management, and Bahir <unk>, our Chief Financial Officer.
Bruce will start the call today with opening remarks, followed by Connor, who will talk about some of the themes we're focused on.
And finally, but here, who will discuss our financial and operating results for the business.
After our formal comments, we'll turn the call over to the operator and take analyst questions in order to accommodate all those who want to ask questions.
I ask that you refrain from asking more than two questions at one time.
If you have additional questions. Please rejoin the queue and we'll be happy to take any additional questions at the end as time permits.
I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance. We may make forward looking statements.
Forward looking statements within the meaning of the applicable Canadian and U S 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 or results may differ materially from such statements for further information on these risks and their potential impacts on our company. Please see our filings with the securities regulators in Canada, and the U S and the information available on our website.
And with that I'll hand, the call over to Bruce.
Thank you Suzanne and welcome everyone on the call.
Results were strong in the second quarter.
We generated fee related earnings at 548 million and distributable earnings of $527 million.
B related earnings were up 16% year over year, excluding performance fees on the back of 12% growth in fee bearing capital to 440 billion highlighting the significant fundraising that we've done over the past year.
The stable predictable nature of the business with nearly 85% of our fee bearing capital being long term or perpetual in nature.
We've been one of the most active managers so far this year demonstrating that our contrarian investment approach and established competitive advantages allow us to put significant sums of capital to work and to monetize assets for our clients utilizing our competitive advantages.
To put some numbers around the first half of the year, we are committed to investments worth 50 billion.
Monetized $15 billion of assets and grown assets under management to 850 billion.
These are large figures in any six month period, but to achieve this in the current environment.
Truly differentiates our franchise.
As we look ahead, we continue to see an attractive investment environment and have a very positive outlook for capital raising.
This backdrop should lead to excellent returns for clients and our recently launched fund vintages and in turn should allow us to continue to raise significant amounts of capital.
Today investors are more selective in who they choose to partner with.
More and more they are choosing managers that offer scale funds.
Flexible co investments and access to deals across a diversified range of asset classes and market conditions.
This fits perfectly with our competitive advantages of global scale.
Deep operating expertise and diversity of products as well as significant benefits our clients get by being part of the broader Brookfield ecosystem.
Year to date, we have had strong capital inflows of 37 billion and expect an acceleration of fundraising in the back half of the year.
Across our flagship and our complementary strategies.
These fund raising efforts alongside the $50 billion of insurance capital from the recently announced <unk> transaction should allow us to raise our record of close to $150 billion of capital this year.
And given the pace of activity in the first six months of the year, we continue to be able to deploy a large amount of capital that we're raising in this environment.
With our significant access to global scale capital, we can focused on investing in the asset classes, where our franchise is strongly positioned.
Such as infrastructure renewable power in transition and private credit by leveraging our deep relationships with institutional investors.
And lenders.
These advantages are very very powerful and in the current market are a differentiator.
Before handing the call over to Conor I'll spend a little time talking about the opportunity.
We see we see once again to acquire great real estate for value.
We've been investing in real estate for over half a century in the company.
And investing on behalf of clients since the early two thousands.
Over that period in that series of funds, we have acquired nearly $100 billion of properties on behalf of our clients.
Across various economic cycles in every sector.
And our track record is extremely strong with an averaged annualized gross return of over 20%.
In the decades, we have invest in real estate, we have found that volatile markets often present, the best opportunities to acquire high quality real estate at exceptional values.
Today, we are in an environment with higher interest rates higher inflation and tightening lender requirements.
All of which create uncertainty and pockets of stress and real estate markets globally.
Particularly though in the U S.
As the current cycle is evolving this story has become one of stress in the capital markets versus versus the fundamentals of most asset classes.
This bodes well for experienced managers with strong access to capital like.
Like us.
The strong will get stronger and as always the week will go away.
It is worth reminding everyone that fundamentals in most real estate asset classes are very strong.
Just a few points retail centers hit record sales in 2022.
Record sales in 2022.
Premier office rents are at all time highs in most cities.
As an example, our south Korean Dubai in Sao Paolo portfolios are 99% full with all time high rents rent.
Rents for logistics properties grew 11% in 2022 multifamily rents in the U S went up 15% year over year hotel rooms are full almost everywhere with ADR is ahead of pre pandemic levels.
These strong fundamentals are coupled with the supply side that will provide very little new commercial real estate inventory in the short.
Or even in the medium term.
Land constraints high material costs and limited financing will keep supply low for quite a while and allow for continued rent growth.
That should outpace inflation.
The combination of the pockets of stress and capital markets.
And strong underlying fundamentals with constrained supply.
Will lead to the best environment, we've seen since 2009 to execute on our long standing investment strategy for real estate, which is to buy high quality assets for value and drive upside through active asset management.
Buying great assets with compromised capital structures is always the easiest way to strong returns.
And Ah repeat that one more time buying great assets with compromise capital structures is always the easiest way to strong returns.
So acquiring great real estate for value is a good start to be able to repeatedly earn excellent returns over the longer term longer term one must also drive operational excellence in our portfolio.
Our operating expertise is based on having people on the ground across the world and decades of experience in all the major real estate sector are hands on approach gives us control over investment outcomes through cycles, and is particularly well suited for today's environment.
We have the ability to leverage our global tenant relationships and the Brookfield ecosystem to great value through our leasing.
Rental appreciation refurbishment and redevelopment of properties are.
Our nearly 30000 people in 30 countries dedicated to real estate gives us exceptional insights into the market and allow us to see virtually everything in the world.
It is during periods of time like now where our opportunistic real estate flagship fund series is designed to take advantage of market turbulence and we have seen the success of our strategy through multiple cycles. We think the latest vintage which is our fifth fund will be an excellent vintage.
<unk>.
Maybe one of our best.
Thank you for your continued support and interest in Brookfield asset management, and I will turn the call now over to Conor.
Thank you Bruce and good morning, everyone.
As we've seen before dislocated markets create fear among investors and this uncertainty then creates opportunity for well prepared and well positioned market participants who are willing to think differently.
Our ability to be contrarian is only possible because of the competitive advantages and insights we derived from the broader Brookfield ecosystem.
For example, insights we get from sitting at the table with leading global corporates on their need for energy data infrastructure real estate and capital.
Secondly, the insights we get through the partnerships, we have developed with the largest and most sophisticated investors.
Understanding their strategic objectives, and gaining visibility into where capital is flowing and where it is not.
And lastly, the insights we get by leveraging the talent of over of our over 1000 investment professionals, who are sourcing opportunities and sharing feedback on a real time basis.
So when asset prices fall out of line with intrinsic value, We can act quickly and decisively.
And given the recent market environment. This is exactly what we've been doing.
This year, we've announced agreements to acquire high quality businesses and assets worth $50 billion, making us one of the most active alternative asset managers in the world.
But recognizing the value opportunity is only the start.
Having the ability to successfully deploy capital in this environment and at this scale stems from several competitive advantages.
Notably we have the ability to raise large sums of capital across diverse sources.
Our private funds or public affiliates and Brookfield balance sheet.
In aggregate, we have 80 billion of Uncalled fund commitments or $100 billion of capital when including Brookfield affiliates, leaving us with ample dry powder to put to work.
We also have strong relationships with the largest lending institutions globally built on our longstanding reputation for prudently funding our businesses, giving us deep access to debt capital to support our acquisitions.
This capital at scale enables us to invest in multibillion dollar opportunities such as the origin and Triton take private transactions, we discussed during our first quarter call.
Our ecosystem also enables us to be early to identify changing trends in global macro in the global macroeconomic environment and shifts and where capital is being directed.
It is not an accident that the businesses in which we have built leading global platforms are very much in favor today.
Digitalization is one of the key trends.
Years ago, we recognized that data was the worlds fastest growing commodity and it would need significant infrastructure to be processed transported and stored.
Behind this growth in data, we've been building out our portfolio around fiber transmission and storage.
Recent advancements in cloud computing and AI have only steepened this curve increasing the demand for data usage going forward.
Today, we are well positioned to be a key enabler for the world's largest and fastest growing technology companies by both meeting their data center needs and also supplying the huge sums of clean power that are required for increasing levels of advanced computing.
In just the second quarter, we committed to acquire businesses collectively valued at $12 billion to meet this digitalization trend.
This includes data for a European data center, operator at a value of $4 billion.
Compass Datacenters at approximately $5 billion.
And network International a digital payments leader in the middle East at a value of $3 billion.
And while we have been very active on the deal fund deal front, finding attractive opportunity for our climate clients.
We have also been exploring prospects for strategic acquisitions to further expand our asset management platform.
Subsequent to the end of the quarter Brookfield reinsurance announced that it signed an agreement to acquire E. L. One of the largest independent annuities providers in the United States.
And while Brookfield asset management is not committing any capital to the transaction, we are set to benefit in several meaningful ways.
First we expect to be named the manager for <unk> $50 billion of Investable capital, which will triple our current insurance fee bearing capital.
And puts us on track to reach the target of $225 billion of insurance capital that we laid out in our five year plan at last year's Investor Day.
Second it significantly enhances our ability to organically grow our insurance assets under management in the future.
American National is currently BN <unk> main insurance platform with 4000 agents today.
Combined with Adl's capabilities Brookfield reinsurance can expect comfortably right, 10% to 12 billion of annuity policies per year.
And with some operational and technological enhancement and the support of Brookfield capital. We believe there is a clear path to get to 15% to $20 billion of annual annuity policies.
This is a very meaningful figure as it would signify that in just a few short years since Brookfield reinsurance first got involved in the business.
Would likely be one of the top three annuity providers in the United States.
That being said and our growth targets.
We foresee BN re taking additional inorganic growth actions as well.
Further by leveraging <unk> investment platform, we should be able to deliver premium risk adjusted returns to Brookfield reinsurance, who in turn can pass those benefits to policyholders, which should only continue to drive more organic growth.
Now, let us switch gears and talk about how we allocate insurance capital across Bam.
Much of the allocation decision is dictated by understanding the regulatory regime in which each policy is based <unk>.
Meeting appropriate capital charges and liquidity requirements.
And matching the duration of the insurance liabilities with the asset mix.
For this we are in a 25 basis point investment management agreement, our IMA fee for the pool of insurance capital we manage.
In this business efficiently allocating assets is equally critical to our overall success as generating strong returns.
Over time building out those capabilities will allow us to further expand our offering to more third party insurers. In addition to Brookfield reinsurance.
We target allocating approximately 40% of our insurance assets into private funds.
Today that number is only 6%.
This allocation will take place over the course of a few years largely based on the timing of our fundraising cycles and new strategies that come online.
The 40% of capital that we will allocate the private funds much of which will be into private credit funds will generate private fund fees on top of the IMA fee and further drive our FRE growth.
And as a reminder, we do all of this without taking exposure to insurance liabilities at Brookfield asset management.
While our insurance strategy is still very much in its early days, we believe it will be a large contributor to the overall to our overall long term success and growth.
But beyond that we believe the growing allocation to private credit from insurance combined with our fundraising efforts across both Brookfield and Oaktree will enable us to grow our credit business to as much as $500 billion of assets over the next five to 10 years and.
In fact, private credit will likely be our fastest growing business.
Scale of this size is extremely powerful.
This large infusion of capital will unlock our ability to do a number of exciting things in our private credit segment.
Of course, we will be able to scale, our funds faster and larger but it goes well beyond that.
We'll be able to make significant investments into our platform seed new funds strategies and grow adjacent businesses.
There is still a lot of white space in private credit and as the asset class continues to become increasingly important in the overall capital markets landscape. Our focus is to further establish and solidify our position as a leader in this business.
I'll conclude my remarks by saying that we are very optimistic about our business organic growth prospects due to the broader growth of alternatives and the massive tailwind driven by private credit as well as the key investment trends of Decarbonization D globalization and digitalization that you have.
Heard us talk about before.
However, we've also demonstrated the power that strategic M&A can have on accelerating our growth significantly.
Ben we have close to $3 billion of cash on our balance sheet and significant access to additional debt and equity capital.
This gives us the ability to look at a wide range of potential acquisitions that can augment and complement our existing platform and supercharge our future growth.
Nothing yet to announce on this front, but with increasing consolidation across our industry. We are actively watching for opportunities.
With that let me turn it over to be here to discuss our financial results and operations.
Great. Thank you Conor and good morning, I'll cover our fourth topics on today's call.
First I'll discuss our financial results for the second quarter second I'll provide an operations update focused on our fundraising efforts for the period.
Third I'll touch on our balance sheet.
I conclude my remarks, with an outlook for the business for the remainder of the year.
So starting with the results and as Bruce noted in his remarks, there was strong we reported FRE theory related earnings or FRE of $548 million in the quarter or <unk> 34.
<unk> per share, which brings our FRE to $2 2 billion for the last 12 months and that represents growth of 16% to the comparative period.
Our distributable earnings or de for the quarter was $527 million or <unk> 32 per share.
This brings our day to $2 2 billion for the last 12 months and that represents a 14% increase to the comparative period. Once you exclude the impact of performance fees that were earned in the comparative period.
Fee revenues in the second quarter were in line with the first quarter and up almost 10% from the prior prior year period.
In the second quarter, we saw an increase in base management fees from our infrastructure platform as our permanent capital vehicles market capitalization increased by $1 4 billion in.
In addition, we benefited from contributions from our newly established infrastructure semi liquid strategy and our infrastructure private credit fund and closes of our fifth flagship infrastructure fund during the quarter.
We also experienced an increase in fee revenues from deployments made by 10th and 11th opportunistic credit funds. These funds generate fee revenues on invested capital and collectively they've deployed $1 $7 billion of capital during the quarter.
These benefits were partially offset by lower fees from our third opportunistic real estate fund that rolled off its investment period in the first quarter and consequently, any uncalled capital for that fund is no longer fee bearing.
Our margins for the quarter were 56% in line with the first quarter of the year we.
We've made meaningful investments over the past year to enhance our platform, which positions us to capture many of the growth opportunities ahead that we've discussed.
In the last 18 months, we've hired over 200 investment professionals across our businesses and significantly bolstered our fundraising organization, which includes the continued buildout of our private wealth channel.
We believe that the bulk of the necessary investments have been made.
This will enable us to start to demonstrate the operating leverage inherent in our business through margin expansion, which we expect to start benefiting our earnings as early as 2024 and for the years to come.
With that as a recap on our financial results I will touch on our fundraising efforts for the period.
Overall, we've reached $37 billion of capital in 2023, thus far and.
In infrastructure the fifth vintage of our flagship fund currently stands at $27 billion of capital raised to date.
Additionally, we have received strong support from investors on the third vintage of our infrastructure debt fund.
Which is closed on over $4 billion of commitments to date, surpassing our initial targets.
We expect a final close on this front later this year as well at a fund size of above 5 billion, making this fund almost 60% larger than its predecessor.
Sticking with the theme of private credit we raised a further $7 billion of capital for our two marquee strategies managed with an arbitrary.
This included $4 billion rates for our opportunistic credit fund and over $3 billion for the first close of their direct lending fund.
And lastly, our nearly 150 <unk> dedicated to Brookfield Oaktree wealth solutions continues to make good progress on a number of fronts as our capabilities, especially in real estate infrastructure private credit continued to resonate with wealth investors across all regions.
During the quarter, we announced an agreement with fidelity investments, Canada to manage a newly formed portfolio of high quality Canadian real estate assets on behalf of fidelity private wealth clients.
Similarly, our open ended private infrastructure offering continues to receive strong support from investors.
We launched a fund in February with a select group of distribution partners outside of North America and have raised in excess of $1 $3 billion to date.
Later this year, we'll launch in additional jurisdictions and expect a further acceleration of this growth.
Additionally year to date, we've we've also nearly raised $3 billion in the various oaktree strategies being distributed within our private wealth channel.
These inflows have contributed to growth in our fee bearing capital, which currently stands at 440 billion and Thats up 12% over the last 12 months benefiting from <unk> $74 billion of fundraising completed across the organization second an increase in the market cap of our permanent capital vehicles.
<unk>, our infrastructure vehicle Brookfield infrastructure partners, and lastly, strong deployment across a number of our credit funds and insurance inflows.
I will now quickly touch on our strong liquidity position.
As of June 32023, BAMS balance sheet, no debt and approximately $3 billion of cash and equivalents that we will utilize for strategic purposes when appropriate.
Pivoting now to future outlook, we anticipate capital raising to accelerated in the second half of the year and our expectation is that we will conclude 2023 with a record level of close to $150 billion of total inflows, which is expected to drive very meaningful growth to our.
<unk> related and distributable earnings for 2024 and beyond.
I will touch briefly on a number of the key our largest initiatives that are currently underway.
This includes our first close for the fifth vintage of our operate opportunistic real estate flagship and for the second vintage of our global transition fund.
Bruce provided the backdrop for opportunistic real estate in his remarks, but as it relates to transition our fundraising for the current vintage is off to a strong start.
While we're still early in the process, we expect strong re ups and are broadening our reach to a larger group of clients is investing in the energy transition is now much more accepted in the market.
In private credit our Mark key Oaktree brand is well placed to benefit from the current market uncertainty scarcity of capital rising rates and for selling.
The 12th vintage of our opportunistic credit funds, along with our newly launched private lending strategy have collectively raised $7 billion of capital to date, and we expect to raise an additional $20 billion over the next 12 months.
Pulled back by traditional lenders is opening the window for more capital deployment at strong risk adjusted returns.
In addition to these flagship funds we have a number of other complementary strategies that are in the market and expect those to contribute quite meaningfully to our overall fund raising targets.
And lastly, as Cotter noted in his remarks with the upcoming closing of the <unk> acquisition by Brookfield corporations insurance business.
Bam is expected to see $50 billion of additional insurance capital inflows.
Finally, before we open it up for questions I'm pleased to report that the board of directors of Brookfield asset management has declared a quarterly dividend of 32 per share payable on September 29, 2023 to shareholders of record as of the close of business on August 31.
And that wraps up our prepared remarks for this morning. Thank you for joining the call and then we'll open it up for questions operator.
Okay.
Operator.
Yes, as a reminder to ask a question. Please press star one one on your telephone. If your question has been answered or you wish to remove yourself from the queue. Please press star one again.
And our first question comes from the line of Cherilyn Radbourne with TD Cowen.
Thanks, very much and good morning.
My first question is with respect to the retrenchment going on in the banking sector. I was hoping you could talk about the potential for Dan to collaborate with your banking partners by effectively providing an external balance sheet to them and just touch on what you consider to be banned competitive advantage is to be the partner of choice in those situations.
Asian.
Thanks Cherilyn.
You're absolutely right.
When people think about the opportunities in the growth in private credit.
Their minds immediately go to direct lending in lieu of the banks, but we see a tremendous opportunity to be viewed as a partner to the banks and.
A lot of people assume that just means that through our different platforms, we might buy loans from the banks, but the real opportunity would be to jointly lend alongside of them.
And with our various.
<unk> and with our insurance capital, we could look to help those banks deploy more capital to their clients. While also servicing our pools of capital, particularly our insurance clients and where our competitive advantage comes from is really two things one the obvious one is our depth.
<unk> scale of capital it makes us the partner of choice for these banks because we can stand alongside them at a size that is of interest and all the major markets around the world, but perhaps more importantly, we have been working with these banks for decades, we are well known to them. We are partners in many of our.
<unk> is already and it's that familiarity with how we like to invest in how we conduct our operations that really puts us in the pole position for these types of partnerships.
Thanks, and then secondly, with respect to be GTS too.
Hoping you could give some more color on how the market interest for that product has evolved how important the deployment track record of the first fund is that as long as the extent to which clients are differentiating between transmission fund versus what might be best called the green button.
Certainly so so a few things to unpack there.
First and foremost when we think of the fund raising environment for BG Tee up two versus <unk> one.
From a macro perspective.
I don't think theres any debate that the trends around decarbonization have done nothing but accelerate for the last three years and therefore the market opportunity is bigger and that is obviously of interest to our clients, but when we think more specifically to the fund itself.
I think there's probably three things to highlight.
Even though we raised quite a substantial fund $15 billion for BG ETF. One it was in fact, a first time fund and despite our deep expertise and capabilities in the space a number of investors were restricted from first time funds or limited in the amount they could invest in we've certainly.
Seen.
Any of those restrictions removed as we move to <unk>.
Said another way, we expect to have a much larger number of Lps in this fund the second thing that has changed over that time period is many of our customers. Many of our clients. They now have a dedicated allocation towards transition investing or de carbonization investing.
Very few of our clients had that dedicated capital allocation three years ago and then the last point to be made is exactly the one you were talking about.
Particularly for the investors in <unk>.
The feedback has been incredibly positive and not only what we invested in how we stuck within the mandate, but also the very attractive value entry points, we were able to secure in that fund and our ability to do that going forward. So we expect significant re ups as well.
And then lastly to the final part of your question.
How does positioning <unk> as a transition fund versus a green fund.
We would take the position and suggest that it's very well adopted that increasingly people understand the right way to invest in decarbonization is not only to invest in what is perfectly green and clean and pristine, but be able to one invest in the build out.
Renewables and other decarbonization solutions, but equally the ability to invest in carbon intensive, but leading industries and be a capital provider and an operating partner to those businesses to help them transition to more sustainable business models.
That's what <unk> does and I think across the landscape, it's pretty universally accepted that that is one a large two attractive and three probably the most rapidly growing opportunity set and one that we think we're well positioned for for <unk> II.
That's my two thank you for the time.
Thank you one moment please for our next question.
And our next question comes from the line of Alexander <unk> with Goldman Sachs.
Hi, good morning, everybody. Thanks for the question.
So I was hoping to start with a question on insurance initiatives.
It remains a big part of the story for you guys, obviously with the <unk>.
<unk> on the comp.
You talked about earning 25 basis points on the IMA and then taking the bulk closer to 40% invested into private funds overtime.
So a couple of questions around that I guess why is 40 of the right number it seems a little higher than what we've seen with some of the other players. So maybe your confidence level that that's appropriate.
Over what timeframe I heard you say a couple of years, but any more specificity specificity. There would be helpful. And then ultimately when it comes to capabilities, we've seen insurance companies allocate more to things like asset backed finance and really kind of investment grade replacement as opposed to distressed in direct lending, which is more of the oaktree business. So your ability to really.
The needed across the existing sort of strategies to get to the 40%.
Thanks, Alex.
Maybe to take that in parts.
In terms of why is 40% the right level.
<unk>.
Apologies for being redundant, but just to make the point again, so much of investing in managing insurance capital is appropriately matching that capital based on the regulatory requirements and the duration of the assets versus the insurance liabilities.
And therefore, when we look at what we can do within our funds. The reason why we think 40% is the right level is because.
Across both Brookfield and Oaktree, we probably have a more diverse set of funds than many of our peers to invest across different forms of credit products that are suitable to insurance and it's probably that breadth of credit offerings that will allow us to have that that more heightened.
Number in our funds.
And then the second thing you mentioned appreciate you framing the question that way.
We're obviously very focused and see a tremendous opportunity and expanding our private credit business and I think we're most people's heads go when you say private credit is.
Investing in leverage finance or mezz debt or other forms of opportunistic credit the real opportunity here and why at Paris, So well with insurance is.
Insurance can invest across a much wider set of credit products and in fact investing across a wider set of credit products is beneficial because that diversity is helpful investing across different credit products.
That are in no way correlated so as we look to build that platform out we're going to look at a lot of the things you said asset backed finance senior loans equipment financed direct lending into high quality corporate we're seeing tremendous opportunities today right now in real estate credit as well.
Seeing some of the regional banks pull back from that market.
I would say the depth of our funds and the different types of credit that are going to allow us to expand.
And Alex.
Bahir I Wonder if your question was with respect to how long it takes.
And maybe I can give color on the existing portfolio today, So we manage.
Circa $25 billion today of insurance capital.
We have already committed 30% of that.
Maybe it's probably a little bit higher.
To a whole bunch of credit strategies, but only one $5 billion of that has been invested to date. So the movement in fee bearing capital has not been all that material, but thats going to come in the next two to three years, because we get paid as you know.
On are predominantly on our credit strategies, we get paid as we invest the capital versus <unk>.
Commit to it so we've already made the commitment.
And we will expect meaningful contributions coming up in the next two to three years just to give you a bit of flavor.
We made meaningful contributions our commitments to our infrastructure and real estate finance debt funds are structured equity.
<unk> BSI.
Oaktree lending partners that we spoke about and.
One of our consumer.
Finance businesses, and that's going to be sort of how this will all play out going forward. Once we also.
Close on the ABL.
Capital, which is roughly $50 billion, we talked about.
Okay, great. Thank you for all that detail.
But here maybe staying with you for my second question I was hoping we can double click a little more into the FRE margin discussion and it was helpful to hear your perspective that you expected the scaling of the business to pick up as we look out into 2024, but I guess, if we look out over the last 12 months revenues are up 17% give or take.
With effectively no operating leverage when you guys are running well below your 60% margin target I think you are at 56% for for this quarter. So understanding that I think <unk> is a big drag within that given they are building out various capacities and various capabilities, but as you're thinking about the path back to that 60% number I guess a is that the right number maybe.
You know a little more color in terms of the timeframe of youre sort of getting there.
And when it comes to Oaktree, specifically are there opportunities to better leverage Brookfield scale and footprint in order to bring their margin closer to what I would say is more of an industry standard when it comes to other credit centric platform. So I think they are at around 30 ish percent margin now if you look at other kind of more credit centric platforms that are north of 40.
Is that kind of the goalposts or how should we think about the scale.
Scaling effect here. Thanks.
Great Alex Thanks for that.
Look we have made.
Again as per my remarks.
Siderotil amount of investment in the business over the last 18 months. We've added 200 investment professionals in total we've added 500 corporate.
Professionals.
We've.
In advance of <unk>.
Raising our direct lending fund.
We've made considerable investments there.
Also on the transition front, that's a newer strategies. So we've made.
A lot of investment there in addition to secondary stats across real estate.
Infrastructure private equity and today, those don't really contribute meaningfully to our revenues, but we've done a great job building out those capabilities and in addition to that also.
Our fundraising organization continues to.
To grow and and also our private wealth channel. So a lot of investment has been made to date, both on the Brookfield and Oaktree sides of the business. It has resulted in our cost going up higher than revenues that was expected just given.
The amount of investment that.
We had to do.
But look it's we're in August now.
We're well through our planning season.
And we think that the majority of that investment has been.
Done and now we're just going to wait and sit back and see.
And wait for the revenues to come in and you are really going to see that operating leverage come through in the costs shouldnt be increasing at the rate they've been increasing starting in next year. So I would expect margins to expand.
Starting in 2020 in fact in the fourth quarter going into 2024.
And Thats.
It can happen both at.
Brookfield and <unk>.
Oak tree side.
Okay.
Respect that.
A question on Oaktree, there margins have been lower than in previous years.
It's a bit transitional they've had a number of funds come off their investment period.
So some of that has impacted revenues.
<unk> been adding a lot of they have been investing a lot in the business.
Also consistent with the Brookfield theme.
Once they get up 12 raised once they get <unk> done and Theyre doing a whole bunch of fantastic stuff across their organization, you're going to see that margin picked up well into the mid to high Thirty's.
Going forward it might just take a bit of time, but.
But onto Oaktree side, there is no real operational issues here. It's just that 2023, which has had a bit of transient or transitional issues. If I can use those terms.
I got you great. Thank you very much.
Thank you.
Thank you.
One moment please for our next question.
And our next question comes from the line of Geoff Kwan with RBC capital markets.
Hi, Good morning, just wanted to ask on the fundraising side. So you've talked about 37 billion raised this year, if exclude the $50 billion from <unk>.
How should we think about in terms of the key moving parts have kept getting to that $100 billion. I think Barry you mentioned, the $20 billion that you're expecting from opportunistic and credit direct lending for the remainder.
<unk> of this year I don't know if its this year next 12 months, but if you can maybe give a little bit more.
Insight as to maybe the pension.
The potential size of some of the larger funds that would contribute to getting to that $100 billion target.
Thanks, Jeff.
Can certainly provide some color on may be corner is going to chime in.
But look we've got about $60 billion or so $65 billion or so to go.
We're pleased with what we've done year to date, we're coming into the year, we've always known.
That our fundraising efforts are going to be backend loaded.
So look we've got all.
Six flagships are out in the market two of them being very very progress being best in BCP.
They'll start they will also contribute a small amount.
For the remainder of the year.
The big ones are going to be B, GTS and the best reps.
And there you heard our remarks, we continue to be very bullish on our.
Fund raising prospects for those funds and then for.
For the two credit funds that you noted.
We do expect to raise $20 billion, but thats as you I think you also noted Jeff that's over 12 months.
That number is going to be anywhere between $10 billion to $15 billion for the remainder of the year. So a few.
Our.
Spectation is just those flagships alone that are out there already where we're having material conversations with clients, making lots of good progress and getting.
Such a positive reception from our clients those alone will contribute to 50%.
That $60 billion or so that we expect at the rates for the balance of the year. In addition to that we've got a whole bunch of complementary strategies that are all we're also out with <unk>.
<unk> talked about bid in my remarks, the infrastructure debt fund, we got our structured equity fund.
We got the fidelity the NAV lending business.
That we have in addition to a whole number of strategies those will contribute to about 15% of that number.
We've got a bunch of also known co investments. So these are some of the transactions are most of the transactions that corner alluded to in his remarks those are such sizable deals.
And what differentiates US is that we're able to do this a lot of times in partnership with some of our larger Lps and we've got a lot of significant co investments that are already known better we expect to close on in the next.
Six months or so so in addition to that there's also insurance flows.
We expect to get in outside of the <unk> $50 billion acquisition. So that's the color I'd give we've got about 60 to 65 billion.
We feel like this line of sight to getting to that number by year end is really good.
And.
And yes.
We will see how it goes.
Hi.
And sorry, just before I ask my second question here just to confirm you were saying 50% of that remainder amount would come from the flagship.
Funds.
50% of that delta to get to $100 billion okay.
And then just my second question is I know, it's early days on fundraising for our bedroom five but just wondering if youre able to summarize at least the nature of the conversations and feedback.
Interest that you've had from Lps and any sort of insights you can share in terms of on asset mix, if that's changed much versus.
<unk> four.
Certainly.
Thanks, Jeff what we would say there is is the comment we've made before that it's perhaps more true today than it was three months ago, which is.
Real estate is absolutely not going anywhere as a sector and increasingly in this environment. This has the potential to be one of the best vintages.
For our opportunistic real estate strategy, just given the uncertainty in real estate markets and what I would say kind of piggy backs on what Bruce mentioned in his prepared remarks, which is.
Underlying fundamentals are actually quite strong across almost all major real estate asset classes. What there is simply a shortage of its capital and this is one of the key things that are large scale fund strategy.
Can provide so the overarching message has certainly been that this is the perfect time for opportunistic real estate and what I would say is the.
The adoption of that view is happening very very rapidly in the current market people were sensing that at the beginning part of the year, but.
Anyone that didn't have that view as quickly coming on side and we're seeing that in the momentum around fundraising.
Okay. Thank you.
Thanks.
Thank you one moment please for our next question.
And our next question comes from the line of Mario <unk> with Scotiabank.
Alright, Thank you and good morning.
Just wanted to talk about.
Kind of the broader industry.
Some article.
Fee pressure or discounting taking place despite kind of a phase III silicon germanium talks are you kind of a longer fee holiday periods.
Larger cone, thus far as a collateral.
Are you seeing any of that in your flagship cover anything today.
Which type of product are you seeing the least amount of pressure versus where you are seeing in Russia.
Thanks, Mario to put it bluntly now.
I think scaled managers.
With strong performance strong track record leadership positions there.
These aren't the ones feeling the pressure.
And I think we're quite fortunate to have leading platforms across all our core asset classes I candidly I expect where that narrative is coming from is smaller or less scaled managers, who are who are doing what they need to to break into the space.
Maybe just to add one more comment on that is.
One of the things that we are able to do with our largest clients is not only pursue the largest investments in the fund but work with those clients to come in as co underwriters are co investors on large transactions.
And that is really a unique thing that we are able to offer to our largest institutional partners around the world and that really I think helps.
Insulate us from maybe some of the fee pressure that other managers might be might be feeling.
And then maybe a quick follow up before I ask my second question.
Kind of where would you rank.
The absolute fee rates for the base fee rate like where would that rank as a soccer amongst your Lps and their decision making process.
With respect to the managers.
Certainly it's a good question Mario and I, maybe answer it differently.
When we have our we haven't adjusted our fee schedules on our flagship products.
And certainly not in recent years I would say they've been consistent over a number of vintages now.
And really when people are when we're engaging with both existing partners and potential new partners in our fund the question isn't about fee rates. It's about performance. How are you differentiated and what can you offer me as the manager things like co underwrite co invest sharing of knowledge and.
And we would like to think we differentiate ourselves on those things. So we don't need to compete.
On fees I would say our fee schedules are consistent in both ourselves and our partners focus on the other criteria first and foremost.
Okay.
My second question, just coming back to the discussion on <unk>.
On real estate, and perhaps seeing the best opportunity that you've seen going back to the GSE.
Been in real estate for a very long time.
You mentioned that the mindset for LP investors is starting to shift today and terminals concerns of evaluation kind of outlook.
<unk> allocated capital in search volume.
How long does that mindset shift typically take six months.
Closer to two years.
We're in the cycle would you see <unk>.
DLP mindset today.
It's Bruce.
I would say the following firstly.
Just to reiterate what Conor just said 80% of properties of the real estate space, which is a lot of fundamentals that are really good.
So.
The issue in real estate largely isn't fundamentals fundamentals are actually really good in a lot of things. There are some things that are not probably 20% of it on the fundamental side.
I would say traditional.
Not premium office in.
Or office in some cities is not so good bad retail is not so good. So theres fund. There are there is real estate that doesn't have good fundamentals, but 80% of it does have good fundamentals really what the.
Situation today is that the.
The financing structures given the increase in interest rates if people were ill prepared.
Or unlucky.
With financing structures.
That is where the opportunity is going to come and.
And I think you're just seeing.
Funding markets opening in both biotech and in real estate and that's cracking open again.
And you will start to see.
Both in.
On the buyout side.
Loans over the next two three years.
Either people won't be able to pay their interest in buyouts or they won't be able to pay their interest on some real estate. Therefore, the capital structures have to get fixed.
And I would say that I don't know what the time period is but over the next 12 to 18 months.
Going to see some very significant or very interesting transactions happen by us or others hopefully us.
And then people will say, we hit the bottom of the market and the opportunity is now.
And I think that's going to occur and the real the real importance of me, saying upfront of 80% fundamentally is good.
The greatest and easiest way to make money in either buying businesses or real estate.
Is to buy great businesses with bad capital structures.
It's hard work buying tough assets and reworking them, we do that too, but it is hard work what's really.
Sure.
Lucrative is when you can buy great assets.
At discount prices, just because they have bad capital structures, and and I think we're going to see that both on the private equity side and in real estate over the next 18 months.
Thanks for the color.
One clarification, if I may.
The comment on buzzard upside maybe being your best ever given the current environment is that comments pertaining to the size of the fund where the potential returns.
Our border.
Let's hope it's both.
Okay.
Perfect. Okay. Thank you.
Thank you.
One moment please for our next question.
Our next question comes from the line of Kenneth Worthington with JP Morgan.
Hi, I think its still good morning here. So good morning first with a numbers question. It seems like the pace of deployment across your asset classes continues to be quite solid if we look at the most recent vintages sorry. Most recent vintage of your flagship funds can you share with us to pursue.
<unk> capital invested for the for flagships being.
Five the transition fund.
BCP six and best Rep for.
Sure so.
We'll run through these quickly on BCP, five where more than 50% deployed.
And the pace there continues to benefit from very.
Strong themes, particularly across Digitization.
On BGP F.
We are over 85% deployed or committed and that is why we are out in the market on <unk> two.
On BCP.
At.
We are more than 70% deployed in in BCP five and in BCP fix we have three investments to date.
So I would say that one's a little bit more modest maybe 20%, 30% and the last one best Rep.
We do not yet have deployment in that fund.
Okay.
Okay great.
This is good enough and then maybe following up on Alex's margin question.
Brookfield <unk> goal is to triple insurance assets.
Following the completion of <unk>.
Giving your and oak trees existing resources and investments what is the current capacity to manage another $150 billion to $200 billion through <unk> funds and separate accounts sort of getting to the.
Insurance companies goals here and maybe asked another way are the incremental insurance investment dollars coming in.
<unk> managed by Bam, particularly high margin given the comments of the investments that you've been making.
Certainly so.
What we would say is and it does kind of pair with what Bahir had mentioned before about investments into our platform.
Similar to how we've enhanced the investment team and enhance the fundraising team we've equally deployed significant.
The insurance capabilities within the firm obviously, if we continue to expand very dramatically as we have in the past we will continue to scale.
Those capabilities as well.
But I would say, we're very well positioned to manage what we've taken on to date and if we do see greater opportunities to expand the platform going forward it would be incremental growth in line with additional capital we've taken on.
Great. Thank you very much.
Thank you.
Moment, please for our next question.
And our next question comes from the line of Brian Bedell with Deutsche Bank.
Great. Thanks, I think we are in the afternoon. After good afternoon.
Maybe just a two parter on the transition fund just first on the timing of number two.
Is it are there any incentives for the op two to get into that first quarter, <unk> <unk> or <unk>.
Does it makes sense that maybe some would push out to next year.
And what kind of.
A portion of a typical fundraise would you see in that first quarter I know the first one was very.
It was very good and its first close given they were.
<unk> got some incentive to sign up for first time fund.
And then on transition.
<unk> debt financing, obviously, that's becoming a another very important.
Asset class within transitioned and just I guess, what's the appetite to launch a dedicated transition that fun like like you have for the and for debt.
Yeah.
Yes.
Perfect. So.
Two comments I would say with all of our flagship it's very difficult to offer a first close discount and transition is one of our largest funds is no different than any of our other flagship and what I would say about our transition fund raising is when we launched <unk>.
One there was a very significant amount of education in the market at the time given it was a new strategy and a relatively new asset class I would expect <unk> to.
To have a fundraising that looks very similar to most of our flagship that we do across all of our verticals.
The second question you asked.
Topical and what I would say is when people think about transition lending.
You can largely put it in two buckets.
One is.
Senior high quality lending to proven large scale de carbonization asset classes like renewables.
And we do that through bid today, and obviously theres tremendous demand for that product.
Bid has already closed closed $4 billion for its current fundraise versus our previous vintage of two 7%.
So that is very representative of the scale that we are seeing in terms of new decarbonization asset classes that are looking to scale that are perhaps less proven their commercial constructs are less mature or less robust those don't necessarily lend themselves to <unk>.
Direct.
Credit lending it often is more of a structured type solution and would fit things.
Things like our BSI or BSS strategies. So we certainly have all those opportunities covered with our leading transition franchise, we're seeing those opportunities. The vast majority of them will continue to do through bid as we have in the past and Thats why were seeing that fund.
Our scale and size very materially.
That's great color and then just a housekeeping one on the the the 40 billion of assets that are not currently earning fees are projected to earn about $400 million annually when deployed or when it moves into fee bearing capital.
Have a sense of timing of of that $40 billion moving into the fee bearing stream.
Okay, great Okay.
Okay, great. Thank you so much thank you.
Yeah.
I would now like to hand, the call back over to managing partner Suzanne Fleming for closing remarks.
Okay.
Thank you operator, and before we end the call I want to mention that we look forward to seeing many of you at our Investor day, which will be held on September 12 in New York.
With that well end the call. Thank you for joining us.
This concludes today's conference call. Thank you for participating and you may now disconnect.
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