No. of Recommendations: 7
David Rubenstein, founder of private equity giant Carlyle, does a great job of interviewing leaders in business and finance. His interview with Bruce Flatt is more than a year old. Nevertheless, I am posting it now on this board for the benefit of existing shareholders who may not have seen it or would like to revisit and also for new investors considering investing in Brookfield. It's just a nice 'overview' type of interview.
Best investing advice: Compounding of returns is an incredible miracle of business and human existence. Everything you learn is additive every day and if you keep at it and don't quit, it's an incredible miracle. It's not just about compound interest returns, it also applies to compound business returns and compound human returns. They are all very additive.
Biggest investing mistake: Selling at the wrong time. Selling when prices go down. Invest for the right reasons, have conviction, and just keep at it. Keep your money in the market. Do not sell!
https://www.youtube.com/watch?v=y3UOPlIHADw
No. of Recommendations: 3
Oaktree's Howard Mark on Bloomberg Wealth with David Rubenstein. Published earlier today. It's very good.
Not OT since Brookfield owns 62% of Oaktree and Oaktree's participation in Brookfield's business plans is steadily growing. For those familiar with Doubleline, another interesting tidbit is that Oaktree owns 20% of that firm. By extension, Brookfield owns 12.4% of Doubleline.
https://www.youtube.com/watch?v=ilJd1mA8AHkhttps://doubleline.com/
No. of Recommendations: 9
Howard Marks and Bruce Flatt are now making rather different arguments, with different implications for the growth of traditional alt managers.
Flatt says a fed funds rate of ~5% produces investment-grade bond yields still vastly inferior to the returns that can be expected over time from Brookfield's investments in real estate, infrastructure, renewable energy and credit, and therefore institutional investors are likely to continue pouring money into alternative assets. Hence the rosy projections of Brookfield's compound annual growth rates going forward. The only change in his sales pitch driven by the current environment is he now calls interest rates "lowish" instead of "low".
Marks says a fed funds rate of ~5% produces high single-digit returns on high-yield bonds and leveraged loans, and low double-digit returns on loans for buyouts, including the biggest, safest buyouts. He calls this a sea change that requires investors to pivot from a regime of lowering and low interest rates that has dominated for 40 years.
If you can get high single-digit or low double-digit returns from these credit instruments, which pay off long before equity holders get the remains, Marks says institutional investors are well-advised to migrate out of equities and investments that promise equity-like returns and into fixed-income investments once again. This would be good for Oaktree, which represents about 13% of Brookfield AUM given the partial ownership stake, but not necessarily good for fundraising in other Brookfield asset classes.
The case for alternative assets has been equity-like returns with less risk. This was appealing to institutional investors in the near-zero interest rate environment that produced inadequate fixed-income returns. But the volatility in prices for commercial real estate, still the biggest alternative asset class, has demonstrated to these investors that while alts may be lower-risk than equities, they are higher-risk than fixed income.
If Marks is right and sophisticated fixed-income investors can now achieve returns more than adequate to meet their mandated rates of return, what does that imply for rates of growth of assets under management for the big alt managers? In particular, what does it imply for growth of the fee business, which is based entirely on growth of AUM?
Rubenstein: So are you forecasting in effect that a lot of the money that's been in private equity or venture capital or equity-like return kind of vehicles are not going to be as popular with pension funds and endowments because they can go into fixed-income instruments which are safer in your view and, given high interest rates, that's probably what they're going to do?
Marks: Well, that's what people should do. I don't know what they're gonna do.
Marks' view reflects the movement among alt managers into direct lending. As banks have retrenched, in part because of duration risk brought on by the rapid rise in interest rates, private lending has grown to fill the gap. Blue Owl Capital, for example, a relatively recent entry into the field of publicly-traded alt managers, pitches itself as "redefining alternatives." More than half its capital base is devoted to direct lending.
Marks' view accommodates those who think the Fed will ultimately cut rates marginally if and when the inflation beast is tamed or the economy goes into the tank. He is forecasting long-term fed funds rates of 2-4% rather than the 0-2% to which investors became accustomed.
According to Marks, Oaktree clients, who generally require IRRs of ~7%, will be able to meet their objectives with credit instruments. If he's right, that has negative long-term implications for alt managers whose investments are dominated by other categories.
No. of Recommendations: 10
According to Marks, Oaktree clients, who generally require IRRs of ~7%, will be able to meet their objectives with credit instruments. If he's right, that has negative long-term implications for alt managers whose investments are dominated by other categories.Good point. Note that Marks himself says so far he has not had resounding support for his 'sea change' position. We will just have have to monitor what happens. They expect fee bearing capital to reach 1 trillion in five years which means they have to add on average 100 billion per year or 25 billion per quarter. Let's keep close watch on the progress.
Renewable Infra Private Real Credit
& transition Equity Estate
Gross IRR 13 16 28 23 22
Net IRR 9 13 22 19 16
Slide 30 of the BAM investor day slide deck shows above returns for the flag ship funds. Not sure over what time frame. No doubt higher cost of borrowing will lower these returns. Renewable is the least attractive, but there might be motivating factors other than maximizing returns for renewable investors.
I was also trying to track down where Brookfield records its Oaktree ownership since it's not on the BN balance sheet. Turns out it's on the BAM balance sheet line item (Investments = 7.364 billion). BAM increased ownership from 64% to 68% in 23 Q2 by paying 487 million.
So through BN ownership, you own 0.73*0.68 = 50% approximately of Oaktree.
Investments are predominantly comprised of our 18% limited partnership interest in BSREP III and a 68% interest in Oaktree. The increase from the prior period of $487 million was primarily a result of income earned from our investment in Oaktree during the period as well as the increase in our ownership interest from 64% to 68%.
No. of Recommendations: 3
Renewable is the least attractive, but there might be motivating factors other than maximizing returns for renewable investors.
An antidote to the above statement. My son works on an LNG plant with next to unlimited gas. He is installing a solar facility at the plant. The project has a negative payout, but a positive public relations.
Craig
No. of Recommendations: 3
"Howard Marks and Bruce Flatt are now making rather different arguments, with different implications for the growth of traditional alt managers."
i am skeptical that marks and flatt disagree on the primary question that the sub 2% interest rate environment will no longer be a durable feature.
regardless, couple of things here i dont get.
first, brookfield is a huge MULTI-ASSET manager. its their job to find the best opportunities among assets that (ideally) should be sufficiently non-correlated over multiple (long) time horizons.
if scale does matter (i.e., if KKR, apollo, blackstone are also not wrong), then it is impossible for alt managers of this size to largely pivot into a narrow investment themes, even if marks and flatt agreed on exactly the same investment flavor of the year. furthermore, many fund vintages and launches are on the basis of specific allocation\themes, not on any recent opportunistic view.
i would rather marks and flatt be very good at allocating to different asset classes, than agreeing with realistic uncertainty, on what may currently be best.
