Subject: Re: BN and BAM valuations
The new BAM should be worth the value of the FRE and the carried interest, or $38.7B, as compared to a market cap as of 12/16/22 of $44.6B. That would imply that BAM is about 15% overvalued.

I think you're still using the wrong share count for the new BAM. Its market cap at a per-share price of $27.10 comes to $44.6b only if you assume 1640m shares, which is the count of the parent, not the spinout. At 412m shares, which should be approximately correct for the spinout (1:4), the market cap is $11.2b.

Also, attributing all carried interest to the spinout isn't correct. In fact, it's almost the opposite. All carry from existing funds belongs to BN. Carry from new funds going forward will be split two-thirds to the manager and one-third to the parent. But because the parent owns three-quarters of the manager, the reality is most future carry will go to the parent.

As to valuation multiples, this is the biggest dispute and explains the vast difference between the various SOTP values assigned to Brookfield as a whole. In their plan value calculations, Brookfield originally assigned a 20x multiple to fee-related earnings (FRE), then bumped it to 25x following the Oaktree acquisition. Many critics thought this too high, noting that even after the bump provided by Oaktree, normalized FRE growth appeared to be in the high teens. Under the old PEG rubric, the multiple should be about the same as the growth rate.

Brookfield disagreed, pointing to the FRE multiple Mr. Market assigns to Blackstone, the leading asset-light alternative asset manager, which flirted with 40x at times toward the end of the bull run. The only sure-fire way to determine a sensible multiple is to let the market decide, which is what Brookfield enabled with this spinout. Eventually, the range of multiples assigned to the new BAM over time will be the appropriate ones to use, whether one likes them or not. Brookfield hopes they approximate Blackstone's, which have been in excess of 25x for much of the last decade. Brookfield skeptics doubt it. The comparison is complicated by different definitions of performance fees and carry between the platforms, and by the fact that BX gets credit for all its performance fees and carry while the new BAM will not.

This leads to the very different subjective valuation judgments we see. Should Brookfield's hard assets be valued according to IFRS, meaning book value, or should they be valued at the multiples historically assigned by Mr. Market? BIP, for example, has routinely traded at more than twice book, sometimes more. To give the parent's stake in BIP a per-share value less than half of what it enjoys in the public market might cross the line from conservative valuation to intentionally understating the marked-to-market value of those assets.

IMO, devaluing the BIP and BEP assets in this way, by using IFRS book, was justifiable back when BPY was public. In those days, Brookfield opted for the most favorable metric for each vertical, which produced an inconsistent and apparently self-serving 'blended' valuation, in which BIP and BEP got the benefit of market multiples, but BPY got the benefit of IFRS book because its market value was much lower. So if you used market values or IFRS values across the board, you got a lower SOTP than the blended method produced.

This inconsistency disappeared when BPY was taken private. As a private entity, it no longer has a public market value, so IFRS book is the logical way to value it, even if some analysts continue to apply the discount to book that the public markets did. But valuing the BIP and BEP assets at 1x book when the public market consistently values them at higher book multiples sets up a weird inconsistency where the substantial stakes in those subs held by the parent are worth considerably less than the same share counts in the listed subs. In other words, it says that the same BIP assets are worth twice as much in the listed sub as they are as a BN holding. That might lead to the conclusion that BN should sell its holdings in the listed subs and reap double (or more) the value assigned to them as holdings of the parent.