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Hello, all. I would appreciation hearing your thoughts on the valuations of BN and BAM. Posts on The Motley Fool Brookfield Asset Management discussion board and The Motley Fool Berkshire Hathaway discussion board, as well articles on Seeking Alpha, give quite a range of valuation estimates, from about $45/share pre-split to $82/share pre-split. Brookfield's own 'plan value' was $82-$94 pre-split. Thank you for you insights.

rrr12345

I would appreciation hearing your thoughts on the valuations of BN and BAM. Posts on The Motley Fool Brookfield Asset Management discussion board and The Motley Fool Berkshire Hathaway discussion board, as well articles on Seeking Alpha, give quite a range of valuation estimates, from about $45/share pre-split to $82/share pre-split. Brookfield's own 'plan value' was $82-$94 pre-split. Thank you for you insights.

I have added you to my favourites so I'll definitely get to this question - and what a timely and interesting question right now, given that we can finally see how the market is appraising BAM - and I will get back with a more considered reply later.

But very briefly, the total economic value (intrinsic value) of the old BAM is exactly the same as the sum of the two new firms - the new BN (replacing the old BAM) plus the new BAM (the spinoff).

However the market capitalisation of the BN plus the new BAM as fallen, compared to the old BAM, so collectively they are cheaper than than they were before the spinoff.

I would hypothesise that some investors are wanting to leave BAM to move capital to BN, so BAM's quote might be irrationally punished for a while, and thus a better investment than BN. I am definitely hesitant to move the capital from BAM to BN for now, until I do a lot more research. The dividend for BAM is not visible yet (the first quarter will be a small dividend only), so we need to look at BAM's distributable earnings to work out the dividend (it will be about 90% of distributable earnings), and then we can see observe what normalised dividend yield BAM is trading at. I imagine it will be too high, with BAM's price too low, but I have not done the calculations yet.

- Manlobbi

'However the market capitalization of the BN plus the new BAM as fallen, compared to the old BAM.

I must be doing something wrong. It looks to me like the combined market cap of BN and BAM went up compared to the market cap of the old BAM. On 12/9/22 the closing price of the old BAM, now BN, was $34.88/share, with 1.64B shares outstanding, for a market cap of $57.2B. At the open on 12/12/22 the price of BN was $36.15/share, with 1.64 B shares outstanding, for a market cap of $59.3B, and the price of the new BAM was $32.14, for a reported market cap of $38.4B. Even today, with the prices of BN and BAM down from the 12/12/22 open, the reported market caps of BN and BAM, per Yahoo, are $52.2B and and $45.5B respectively.

'On 12/9/22 the closing price of the old BAM, now BN, was $34.88/share'

Oops. That's per Yahoo, and it's incorrect. The closing price of BAM, now BN, on 12/9/22 was $45.13/share, for a market cap of $74.0B. That's still lower than the combined market cap of BN and BAM at the open on 12/12/22 of $59.3B + $38.4B = $97.7B.

For a shareholder of the old BAM the value on 12/9/22 was $45.13/share, and the value at the open on 12/12/22 of one share of BN plus 0.25 shares of BAM was $36.15 plus 0.25*#32.14 = $44.18, very slightly less than the value of one share of the old BAM on 12/9/22, so that seems right.

The closing price of BAM, now BN, on 12/9/22 was $45.13/share, for a market cap of $74.0B. That's still lower than the combined market cap of BN and BAM at the open on 12/12/22 of $59.3B + $38.4B = $97.7B.

If you're taking those market cap figures from Yahoo, or any other free data provider, I wouldn't rely on them. The name change has done a number on automatic data feeds. Yahoo shows BAM, the new sub, with 164b shares outstanding, which is what the old BAM, the new BN, had. Issuing one new BAM share for every four old BAM (new BN) shares, should result in a share count roughly one-fourth that size for the new sub. The share price would have to be about $96 to achieve a value of $38.4b. I'm going to await the first quarterly reports post-spin to develop a baseline of the new numbers.

In any case, before the markets went to hell, when the old BAM touched $60, its market cap approached $100b. Mr. Market struggled to value the combination of asset-heavy and asset-light businesses that made up the mother ship. Asking it to separate the fee business, assign to it a new multiple, then subtract 25% of it from the mother ship, which itself now deserves some synthesis of the old and new multiples, owning as it does 75% of the new sub . . . well, it's a lot. The immediate reaction was apparently to treat the new BAM like its idol, BX, which is down roughly 20% in a month, owing to the new conventional wisdom that private equity shops will be victims of a the coming higher interest-rate environment.

I am not so sure this is true and think the current prices of BX and BAM offer interesting opportunities. If central bank interest rates peak where currently projected, and then retreat in response to a recession next year, which seems as likely a scenario as any at present, alternative asset returns will continue to be preferable to fixed income yields for quite some time, although bonds purchased in the relatively brief window at the peak will offer a nice combination of appreciation and yield. The rate of capital inflows might slow, but the recent baseline is a gusher so that might not be too bad.

The spin was intended to earn the fee business a multiple similar to Blackstone's, which Brookfield hopes would then be reverse-engineered into the valuation of the mother ship, which still holds 75% of that asset-light business. But the present moment, in which central bank interest rates have increased with a rapidity not seen in 40 years, is probably not the optimal moment to test it. I suspect it will be a year, at least, before the multiples are sorted out and the effects of the spin can be objectively evaluated.

'On 12/9/22 the closing price of the old BAM, now BN, was $34.88/share.... Oops. That's per Yahoo, and it's incorrect. The closing price of BAM, now BN, on 12/9/22 was $45.13/share'

No, that's wrong, too. Different data sources are giving different historical prices.

The Brookfield website shows the price of 'BN' on 12/9/22 as $35.15 USD and on 12/16/22 as $32.40 USD. It says the market cap of BN as of 12/16/22 was $13.355B, implying 412M shares outstanding (what?).

https://bn.brookfield.com/stock-distributions/quot...

The Brookfield website shows the price of BAM on 12/16/22 as $27.11 USD and the market cap as of 12/16/22 as $44.11B, implying 1.638B shares outstanding. The Brookfield website does not show historical data for BAM.

https://bam.brookfield.com/stock-distributions/quo...

Sorry to be slow, but this is confusing.

The Brookfield website shows the price of 'BN' on 12/9/22 as $35.15 USD and on 12/16/22 as $32.40 USD. It says the market cap of BN as of 12/16/22 was $13.355B, implying 412M shares outstanding (what?).

They're having the same automated data feed problems as everyone else. The share counts are reversed, probably because 'BAM' represented one entity until Dec. 9 and now represents another. The 412m share count sounds about right for the new BAM, as it represents one share for every four old BAM (new BN) shares, and those number 1640m.

That would yield a current BN market cap of $53.1b (1640m*$32.38), a current BAM market cap of $11.2b (412m*$27.10) and a combined current market cap (comparable to the old BAM) of $64.3b. That's a pretty good discount to the BAM market cap a year ago, but then, so was the pre-spin price, just not to quite this extent.

Some analysts think the new BAM, the spinout, is the better buy now because of the selling that often accompanies spinouts and because of the higher multiple its asset-light model should eventually offer.

I have seen less discussion around what appears to be a disproportionate drop in the BN price. If, for simplicity's sake, the old BAM was roughly half asset-heavy owner/operator and half asset-light manager, divesting one-quarter of one-half the business (25% of the manager) should reduce the parent's value by one-eighth, or ~12.5%. But BN is down from the pre-spin BAM price by about one-quarter, or twice that, from the low 40s to the low 30s. If and when Mr. Market recognizes this overreaction, BN's price, which represents 100% of the owner/operator and 75% of the manager, should recover somewhat.

Of course, it's impossible to separate the immediate price effects of the spin from the simultaneous drop in valuations across alternative asset managers generally, so it may be that these prices don't normalize until those do.

Thank you, ultimatespinach. I think I may be finally starting to get my head around where the value lies (pun intended).

I updated bjlkeng's conservative Q2 estimate for the value of the old BAM using Q3 data. BJlkeng's value estimate was posted on The Motley Fool Brookfield Asset Management discussion board on August 16th.

https://discussion.fool.com/t/conservative-valuati...

Bjlkeng got a value/share of $45.37, or a total value of $74.4B. $36.9B was the net value of the invested capital using IFRS figures. $37.5B was the value of the fee related earnings (FRE) and the 5-year average net carried interest, both valued at a multiple of 15x. Updating the numbers using BAM's supplemental data for Q3, I get a value of $45.35 per share, or $74.3B total value. $35.7B is the net value of the invested capital using IFRS figures. $38.7B was the value of the fee related earnings (15*$2.031B) plus the 5-year average net carried interest (I used bjlkeng's Q2 value for the 5-year average net carried interest).

If I did my algebra right (big if), then post-split BN should be worth 1x the invested capital plus 0.75x the value of the FRE plus carried interest, or $35.7B + 0.75*$38.7B = $64B, as compared to a market cap as of 12/16/22 of $53.2B. That would imply that BN is about 18% undervalued. 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 don't doubt that fee related earnings will grow faster than net invested capital, which one could argue makes BAM the better investment compared to BAM. However, BN appears to be cheaper relative to fair value than BAM, and BN is the boss. BN decides the strategy, the investments and the fees, and they also own 75% of BAM.

I look forward to seeing the value estimates of other board members who know BN and BAM much better than I do.

I think that BN is a remarkable company. They own some premier properties, and they're very good at attracting co-investors for those properties, despite charging high management fees. However the investor presentations are a turn-off. They're sales pitches. They over-value the properties, and they over-value the management business (25x-35x FRE). I think they also over-estimate the rate of growth of fee related earnings (17%/year). Still, I am considering buying BN for the properties, the management fees and the current undervaluation.

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.

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.


$11.2B sounds way too low. I think the 75% kept by the parent are also shares outstanding and part of the market cap. Even though only 25% of the shares are trading publicly.

Thanks once again, ultimatespinach. Clearly I have a lot to learn about BN's and BAM's proper valuations. The good news is that if my value estimate for BN of $39/share is too low, then BN is even more undervalued than I estimated. I look forward to seeing other people's valuations. Can you offer a ballpark estimate for BN and BAM?

Using approximate numbers, 1.635 billion shares at 32.38 equates to a 53 billion market cap for Brookfield Corp (BN).

408.825 million at 27.11 equates to a 11 billion market cap for 25% of Brookfield Asset (BAM). Therefore, 75% of BAM is 33 billion and 100% of BAM is 44 billion. Based only on fee-related earnings of 2 billion per year, this is a multiple of 22.

'Pure BN', i.e., (BN - 0.75*BAM) = 53 - 33 = 20 billion. However, note that Net Invested Capital alone is 35.727 billion at 3Q quarterend. I think the discrepancy can be attributed to the market assigning a 50% discount to Brookfield Property Group (BPG) IFRS value just as it did when BPG was publicly listed. BPG is listed at 31 billion on the balance sheet, but market obviously does not agree.

Current prices equate to a pre split market cap of 53 + 11 = 64 billion = 39/share. This is till above the recent lows in the 36 - 37 range.

Both BN and BAM are priced inexpensively. Doesn't make sense to sell or switch. Hold tight and dollar cost average if adding.

Any view on BIP at current price?

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