Managing Resilience
An in-depth stock analysis on Brookfield Corporation
Hey investor 👋,
I’ve done the research so you don’t have to. This week’s stock report for premium subscribers: Brookfield Corp. All premium subscriber perks, here.
Over the past year, I’ve noticed Brookfield’s name become more and more frequent everywhere I scrolled on the internet. I subconsciously garnered an interest in the company from this. Aside from the name, and the understanding it’s an asset management company (a very broad specification by the way; all asset management companies are not made equal), I didn’t know anything at all about the business, what they do, or if they were worthy of an investment. Now, I’m happy to say, that’s changed. And it’s been a long ride.
Let’s get into it. (31 min read)
Today at a glance:
Brazil to Brookfield (history)
Business model & analysis
Management quality
Stock performance & financials
Risks, moat & competition
Growth aspects
Valuation
Brazil to Brookfield (history)
Brookfield’s journey begins with a Canadian, but, believe it or not, starts in Brazil. It’s a very interesting story.
Founding
What is today Brookfield, a Canadian company, was founded by Sir William Mackenzie and Frederick Stark Pearson. Although not surprising, only one of the previously mentioned founders was Canadian: Sir William Mackenzie. Let’s start with William, shall we?
William Mackenzie was born in present-day Peterborough, Ontario, in 1849. He was raised by a poverty-stricken Scottish-born Presbyterian family with eight other siblings, growing up in a log cabin with mud floors before becoming one of the most influential and wealthy Canadian businessmen to have ever lived. After working as a teacher for around two years, he became a merchant, opening a general store in his local village called Kirkfield. In honour of his absolute hatred for chasing houseflies, William named his general store “Shoofly Store.”
This store was William’s first shot at business. And he loved it.
A year or two pass and William moves away from his general store and, partnering with his brothers, enters the lumber business, operating a sawmill and a door, sash, and furniture factory. He and his brothers, from this, became contractors, starting the Mackenzie Brothers Construction Company.
They built schools, houses, hotels, warehouses, and even bridges — you name it. Everything the Mackenzie Brothers touched was built with incredible quality. As time went on, their quality control and amazingly well-constructed projects earned them a huge reputation in the area. So much so, that when the construction of the Victoria Railway began in 1874, the Mackenzie Brothers ultimately won the contract to build the bridges, trestles, and the railway station in Kinmount, Ontario. (This station is still standing today):
Because of their tremendous job for the Victoria Railway, more railway contracts gravitated towards the Mackenzie Brothers. From this, William began to make high-profile contacts in the railway industry, most prominently with George Laidlaw and James Ross (the owner and chief engineer of the Victoria Railway, respectively). Over time, William’s love for railways grew and grew, and, leveraging his connections, he approached James Ross, who mentored him and taught him about the ‘art of railway.’
In 1891, William became the owner of the Toronto Street Railway, and in 1895, together with Sir Donald Mann, a fellow railway contractor, he began purchasing and building rail lines in the Canadian prairies, which would soon form the Canadian Northern Railway, Canada’s second transcontinental railway system. William was the only private businessman at the time to build and own a transcontinental railway.
After financial troubles, the Canadian Northern Railway went bankrupt, and in 1918, was absorbed by the Canadian Government Railways, creating what is presently the Canadian National Railway.
But before all the bankruptcy, at the peak of William’s success, he and an American businessman named Frederick Stark Pearson created a little Brazilian energy and transport company called São Paulo Tramway, Light and Power Company. More on this later in this section, but let’s first get into the history of our second founder, Frederick, who was crucial to the creation of Brookfield.
Frederick was born in Lowell, Massachusetts, in 1861, 12 years after Mackenzie, into what I’d say was a more well-off family. He graduated from Tufts College with a bachelor’s degree in mechanical arts in 1883, becoming an instructor in mathematics and applied mechanics at that same college for three years. During this time, he received the Walker Instructorship Award in Mathematics before finally transitioning to a career in electrical engineering.
Frederick first started as a consultant at a gold mine in Virginia, and in January 1887, completed his transition into a practicing engineer. His engineer career began with managing electric companies in Boston, Massachusetts, where his great work attracted great attention. His success and amazing work ethic in Boston led to an offer to become the chief engineer of the New York City Metropolitan Street Railway in 1894.
From the 1890s onwards, his work reached the global stage, where he developed utilities in Canada, Brazil, Mexico, and Spain. This is where Frederick truly shined. Overtime, his experience led to a deep interest in Brazil, particularly in São Paulo and Rio de Janeiro, where he created and managed large-scale infrastructure projects, capitalizing on Brazil’s industrial boom and the high-growth economies of Latin America at the time (still true today). In this context, Frederick wasn’t just an amazing engineer (which he undoubtably was); he was responsible for the creation of most of Brazil’s current infrastructure.
With his history as a railroad engineer, combined with his interest and professional presence in Brazil, Frederick eventually crossed paths with William. Together, they laid the foundations to (indirectly) revolutionize global infrastructure.
In 1899, William Mackenzie, partnering with Frederick Stark Pearson, took over an old mule-drawn tramway in São Paulo and reincorporated it as the São Paulo Tramway, Light and Power Company (SPTL&P), headquartered in Toronto, Canada. Using William’s expertise in transportation and construction, and Frederick’s expertise in electricity and infrastructure in Brazil, the two quickly created a powerful entity, introducing the first tram car in São Paulo. Eventually, the company powered two-thirds of the entire country’s electricity.
In 1904, the same founders established the Rio de Janeiro Tramway, Light and Power Company (RDTL&P) (the same operational concept as the aforementioned company, but for the nation’s capital). By 1912, both companies were combined under the holding company Brazilian Traction, Light and Power Company, which publicly traded on the stock market and later rebranded as Brascan Limited (a portmanteau of Brazil and Canada).
Sir William Mackenzie died in Toronto in 1923 and was inducted into the Railway Hall of Fame in 2002 along with his partner Sir Donald Mann (both were knighted in 1911). Frederick Stark Pearson and his wife were tragically killed aboard a torpedoed British cruise ship in 1915.
(Segue) By 1972, Brascan had sold most of its Brazilian assets to the Brazilian government and Brazilian companies due to Brazil’s increasing opposition to foreign capital controlling the country’s key infrastructure and utilities. This transferred SPTL&P and RDTL&P to Brazilian control. However, by this time, the company had diversified beyond Brazil and beyond utilities and transportation (more on this below).
In 1954, Peter Bronfman (a member of the wealthy Bronfman family) sold his shares in Seagram Company and, with his brother Edward Bronfman, founded a venture capital and investment company called Edper Investments. This company grew rapidly, acquiring stakes in hundreds of businesses and, at its peak, owning what was then roughly 15% of the entire market capitalization of the Toronto Stock Exchange — all while being a completely private company. (Heck, the founders of Edper owned the Habs for a while.)
Near the end of 1978, Edper began buying shares of Brascan, and by the end of 1979, the company owned roughly 50–60% of Brascan’s total outstanding shares, giving it effective control over the company and its direction. Over the following decade, Edper used Brascan and its resources as a platform to expand across a variety of sectors in North America and globally — into real estate, mining, physical infrastructure, and transportation (including in Brazil, though selling most of its Brazilian assets). It also expanded its footprint in renewable energy and financial services as those sectors started to become more attractive. These expansion efforts led to Brascan’s official entry into the United States in 1996 with the purchase of marquee properties from real estate developer Olympia & York, which included New York City’s World Financial Centre. And this wasn’t even the tip of the iceberg.
In 1997, Edper Investments (The Edper Group) merged with Brascan Limited, forming EdperBrascan Corporation. In 2000, the company renamed itself Brascan Corporation and listed on the New York Stock Exchange. Then, five years later, the company underwent its final name change, becoming Brookfield Asset Management Inc. Brookfield is now the 14th-largest asset management company in the world, with around $1 trillion in assets under management (AUM).
Brazil to Brookfield… an unexpected journey.
Business model & analysis
Brookfield Corporation is a globally diversified alternative asset manager designed to generate returns on capital for itself and its shareholders through the operation of its many businesses investing in alternative investments. Not through traditional pathways like bonds, stocks, or otherwise, but through high-quality real, longlasting businesses and assets like infrastructure, private equity, real estate, energy etc.
Brookfield Corporation today is the parent company of the many businesses it created throughout its history (which it spun off into publicly traded entities, created during its high-investment business diversification era with Edper). But there’s something very important to know about Brookfield before we get into the business model: Brookfield Corporation is not Brookfield Asset Management.
Operational structure
(I’ve made this section as simple as I could while retaining the information needed to fully understand the structure. Bear with me, as even with this simplification, the following section may still be complicated.)
In 2022, Brookfield announced a spin-off of its asset management company onto public markets. This was done to allow the market to understand the true value of Brookfield’s asset management business, which, in the past, it hadn’t, and to further streamline the corporate structure of what is now BN. From this split, Brookfield Corporation (BN) was created, which now owns 73% of the newly spun-off asset management business (BAM) privately, with 27% of the business being listed on the stock market. BN and BAM are separate entities.
This model has just recently been announced to change for simplicity, as BN looks to increase BAM’s chances of being included in U.S. stock market indices. BN will now be moving its headquarters to New York from Toronto and will be converting its current ownership in BAM into public shares. BN will keep its 73% equity control of BAM, but this ownership will be in the form of publicly outstanding shares, not privately held. After this change, the publicly traded BAM will now account for the entire asset management business.
BN owns stakes in publicly traded businesses that make up Brookfield. It’s part of the structure BN operates in, where its main businesses are spun off onto public markets, where they then control large stakes. There are many reasons they do this, but one reason, in particular, is so the market can value their assets more easily. If the market prices the shares of these businesses at low enough prices (which does happen), BN simply buys the business back at that discounted price until later relisting the business on the market when sentiment changes.
Brookfield is made up of six main businesses, all of which are publicly traded, separate entities, in which BN holds stakes. This is the structure of BN and how its business operates. This is where it gets somewhat complicated.
BN manages the capital to these businesses and provides the overall strategic direction by placing well-trained BN executives as leaders at these companies. This way, these businesses can manage their day-to-day operations independently from BN, but are still being managed according to BN’s liking. These businesses are what is part of the Brookfield Ecosystem. Remember this term.
This leads us to the business model.
Business model
BN today is the mothership, the parent company, of the many businesses it’s created throughout its history. The company is mainly made up of six businesses: asset management, renewables, infrastructure, private equity, real estate, and insurance. Many of these businesses are publicly traded and owned by BN according to the structure outlined above, while others are privately controlled.
BN’s assets are managed through these different specialized companies, owned or partly owned by BN, as described in the operational structure section above. The revenue — and, more importantly, the cash flow — BN earns, comes from dividend distributions, realized gains on investments, and insurance premiums collected from these subsidiary businesses, in which BN holds majority or minority stakes. Since many of these businesses are public, the income generated and the value of BN’s stake in them are much easier to assess (which is great for you and me as potential shareholders).
Now, for all businesses you own or plan to own, I believe it’s best to have an amazing understanding (or, as I like to say, an “outstanding understanding”) of the business before you buy it. Let me just come clean with you: BN is not a simple business. It’s complex. It’s home to many businesses that generate the cash flow providing your returns and make up the company you invest in. It may seem like a daunting reality, but aside from the structure, even with the complexity, BN is not hard to understand. Here’s a brief yet thorough overview of BN’s main subsidiary businesses and how it earns income from them:
Understanding the business(es)
Brookfield Asset Management (BAM): This is Brookfield’s asset management business. It manages assets across sectors within both the Brookfield Ecosystem and on behalf of private institutions and governments, collecting management fees for doing so. These assets include Brookfield’s credit (debt) business, as well as the infrastructure, real estate, private equity, renewable energy and insurance assets (which BAM manages on behalf of those businesses (a large majority of the total assets in the Brookfield ecosystem companies are managed by BAM). BAM does not own any assets; it simply manages them and collects fees for doing so. Wealth funds, individuals and so on, all come to BN to manage their capital, and this capital is, in turn, managed by BAM. BAM earns income purely from fees. This includes management and performance-based fees. An investment into BAM is a bet on the asset management business exclusively. With BAM, you do not get access to the ownership of the assets themselves.
BN owns 73% of this business.
Brookfield Renewable (BEP): This is Brookfield’s renewables business, which focuses on the ownership and operation of renewable energy assets globally. This is through the acquisition and operation of hydro and nuclear plants, solar farms, wind energy projects, battery storage etc. The electricity generated is then rented or leased to governments, utility companies, and corporations under long-term contracts. This is how BEP earns income, which it earns with the goal of producing consistent long-term growth for shareholders via dividends.
BN owns 46% of this business.
Brookfield Infrastructure (BIP): This is Brookfield’s infrastructure business, which focuses on the ownership and operation of infrastructure assets globally. This includes the acquisition and operation of airports, toll roads, railroads, ports, gas pipelines, data centres, cell towers, and more. These infrastructure assets are then rented or leased to governments, utility companies, and corporations under long-term contracts to (again) provide income with the goal of producing consistent long-term growth for shareholders via dividends.
BN owns 26% of this business.
Brookfield Business Partners (BBU): This is Brookfield’s private equity business, which focuses on acquiring cash-producing businesses (most commonly in the financials and industrial sectors (sectors Brookfield is most knowledgeable in). BBU holds these businesses for the long term, increases their value, and collects cash from them until they are eventually sold for a profit down the line. The cash collected from these businesses along the way is usually reinvested into acquiring more businesses. Some cash is paid to shareholders in the form of dividends.
BN owns 61% of this business.
Brookfield Property Group (BPY): This is Brookfield’s real estate business, that buys, operates, rents, and leases shopping centres, malls, residential and commercial properties, and more across the globe. This business is wholly owned privately by BN, and all of the cash generated from it goes directly to the mothership company.
BN owns 100% of this business.
Brookfield Wealth Solutions (BNT): This is Brookfield’s insurance and wealth management business (newly created in 2020) which focuses on insurance and wealth management primarily through American Equity Investment Life Insurance and Oaktree Capital Management. The premiums and fees generated from these businesses are reinvested according to BN’s alternative asset management strategy.
BN has complete effective control over this business (as outlined above), but the structure may be much simpler than how I described it. (I could not find any actual explanation of equity ownership).
BN earns its revenue — and therefore cash flow — in two main ways. (1) Dividends earned from the ownership of the businesses mentioned above, and (2) capital appreciation and realized gains on assets. Again, every single one of the businesses mentioned above is independently operated. Although these businesses fall under the Brookfield name, they are separate from BN itself. BN simply owns stakes in these businesses and uses that ownership to provide management direction and strategic oversight (while earning distributions) which it then reinvests across the ecosystem to continue growing. Same applies to the capital appreciation aspect. This is an unnecessarily complicated business structure, I know, but hopefully I’ve made it easier to understand.
(By the way, this structure, albeit complicated, is done to simplify asset value and maximize capital. Having these businesses publicly listed can potentially increase their value (as the market may value them more (like it did with BAM), make it easier to track the value, and give BN the opportunity to purchase the company at a discounted price if the market doesn’t value it fairly (which happens often).
BN has consistent and easy access to capital from its many businesses, and with its expertise in the sectors it operates in across its ecosystem, BN is able to deploy capital in an incredibly effective way. This amazing capital deployment leads to a strong track record of returns which attracts outside investments and interest, helping BN grow even more. For instance, let’s say BN wants to buy a massive amount of shopping centre real estate in, I don’t know, Chicago, to expand its property business.
Say this move will cost $20 billion, and BN does not want to spend all that cash. Thanks to its massive reputation and scale in the alternative investment industry, BN has the option to partner 50/50 with a private wealth fund and purchase those assets together, sharing some of the cost. BN would only own 50% of the real estate assets directly, but the remaining 50%, now owned by the wealth fund, will be managed by BN’s asset management business. In this case, BN still gets to manage 100% of the assets they originally wanted, while earning from the assets they don’t own, by collecting fees — at half the upfront cost. BN shares the risk with its partner, but reaps most of the benefit. How awesome is that?
Of course, this is a completely made-up example with some potential flaws, but that is the gist of things. BN does do these types of deals every day across its ecosystem — some with partners, most on its own. Some are smaller, some large — all designed to scale and provide not only the best, but consistent returns on capital possible. Across all of its businesses, BN always looks to maximize capital by recycling or selling off investments when they believe they can get better returns elsewhere, strategically partnering to expand its businesses, and actively managing its portfolio across the ecosystem to optimize returns.
Ok, now take a deep breath, and pat yourself on the back. You just learned the basics of BN’s business model and that’s no easy feat. But! Before we dive into the management analysis, there’s one final crucial aspect of Brookfield you need to know about: the untraditional way they measure profitability.
Dividend calculation & profitability
Brookfield (referring to all businesses within the Brookfield Ecosystem) calculates its income and cash flow, and its profitability, in an uncommon way. Instead of using free cash flow or net income, the businesses in the Brookfield Ecosystem use the metrics funds from operations (FFO) and distributable earnings (DE). FFO is a metric used to calculate the profitability of a business, adjusted for non-cash effects like depreciation and amortization (which are common in capital-heavy businesses). What this means is FFO removes any items from the cash flows that don’t affect cash flows (things like depreciation).
Brookfield uses this metric in its real estate, infrastructure, and renewable businesses (its cash-intensive businesses) to more accurately reflect the profitability of their operations. For example, real estate generally appreciates in value over the long term, but depreciation (the cost of an asset over its lifetime) does not account for this appreciation. Since depreciation does not affect the actual cash flow of the business, it should not matter to the investor, says Brookfield (this applies to all physical asset businesses of Brookfield, including infrastructure and renewable etc).
DE is the main metric used to reflect the actual cash flow available to be distributed to shareholders or investors after accounting for capital expenditures and maintenance costs. It places an emphasis on the cash flow available to investors rather than the paper profits made by the business according to standard accounting practices. This makes DE a much more accurate indicator of dividends (aka, distributions) of the income Brookfield generates for its shareholders (since a big part of Brookfield’s business model is based on distributions from its businesses and returning cash to shareholders).
This is why the businesses across the Brookfield Ecosystem often have unusually high payout ratios — over 100%, and sometimes even negative — because the distributions are not calculated based on earnings or net income according to GAAP1. Instead, they’re calculated with FFO and DE, but primarily DE. (For the record, because of this setup in Brookfield’s financial reporting, DE can be considered the free cash flow (FCF) equivalent metric for Brookfield when we go about valuing the business.)
If you’ve made it this far without any hardship, you’re 85% complete in understanding Brookfield at its core. The so-called ‘hard part’ is over. We’ve toasted our bread; now it’s time to spread the butter2, starting with an understanding of the quality of management.
Management quality
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