Bruce Flatt has been the CEO of Brookfield Asset Management for the last two decades, building it to become the world’s second-largest alternative investment business. He is responsible for more than $725 billion in assets spread across real estate, private equity, infrastructure, energy transition, credit, and insurance.
Flatt shares his broad perspective in an exclusive conversation with CNBC’s Delivering Alpha newsletter, in which he explains why he isn’t worried about the economy’s multiple obstacles.
I’d want to start by giving you a bird’s eye perspective of the economy, since you’re in such a unique position right now. What has been the effect from your vantage point, given all of the reasons that have prompted the public market sell-off – inflation, rising interest rates, geopolitical fears, China, Russia supply chain issues, and so on?
Long-term wealth development is about putting money into excellent companies run by great people and compounding over time. So, despite wars, pandemics, explosions, recessions, and everything else you listed, we’ve simply been buying fantastic firms, compounding, and reaping wonderful profits over the last 30 years. So, I think I’d simply suggest that everyone should remain invested, not get too enthusiastic about the daily market gyrations, and just stick with it. And it is the key to investment success.
In light of what you’re witnessing in the deal market. Do you see any signs that any of those things are on the horizon in real estate and other areas where there are fears about a recession and doubts about whether we’ve struck bottom?
Flatt: The good news is that company balance sheets are in excellent shape. Personal financial statements are quite solid. If we do have a recession, it will be a mild one, which is a positive thing. But there’s no question – look, we need to get inflation down over the globe, and it’ll either come down naturally over time or be forced down by central banks. And although those two situations are so different, they will both be successful. We’ll get through it all, just as we always do. We’ll make it to the other side. What matters to us is that inflation has a significant beneficial effect on real assets. And they are genuine return investments that create – they’re very cash productive, which is a really good thing for the sort of assets that we hold.
What’s the deal with that? Given the rising cost of debt, why is inflation so positive?
Flatt: When we acquire real estate, we invest a significant amount of money up front. In comparison, your expenditures are low, and your profit margins are significant. As a result, when inflation occurs, it affects the whole asset, but only to a little degree the costs. So, when you add inflation into the revenues and it effects, the revenues compound much, much more over time. Now, if you don’t have fixed rate leverage, your debt will go up a little bit, but many individuals who buy these assets now do. They should have fixed their leverage at record lows during the last several years if they were doing what they should have been doing. But, to take a step back, all of these assets perform well at low-ish interest rates, and low-ish interest rates are predicted to continue in the future. We won’t have rates as low as they were, but we’ll have low-ish rates, whether it’s 3% on the Treasury, 4% on the Treasury, or 5% on the Treasury; these assets that we hold perform very well.
So you’re not afraid of five-ish?
Flatt: Not at all. We’re not going to make it. But no.
You just announced a well-publicized proposal to spin off a quarter-share of your asset management company. What are your objectives for this transaction?
Flatt: Our company is essentially divided into two segments that operate together but are extremely distinct. We have $75 billion in capital that we have kept in the firm over the last 30 years. And since most people haven’t done so, we’re quite special in that regard. Then there’s asset management, which is a very separate company. They get along OK, but it’s simply different. As a result, we’re spinning off 25% of that firm to our shareholders. So all we’re doing is splitting what each shareholder owns into their primary security, and they’ll now own 25% of the asset management company. However, in the future, a security owner will have more options, and many will likely stick with us at the top. However, if someone just wants exposure to the asset manager, they may purchase that one. And I believe it will benefit shareholders, but it also enables us, from an industrial standpoint, to have a security that can be used in a particular industry if we so want. With that assurance, we could undertake M&A or other things.
Reading between the lines, it seems that you may utilize it as a currency for future asset management M&A. I understand you just acquired Oaktree, which was a significant asset management acquisition.
Flatt: In credit investment, Howard Marks and Bruce Karsh are the greatest. We didn’t acquire Oaktree; instead, we collaborated with them. So we acquired 65 percent of Oaktree and bought the public out. They kept their 35 percent ownership stake, and we’re excited to work with them. And we did so by paying a combination of cash and parent company stock. We don’t generally issue shares to the parent business, and we have no intention of doing so in the future. So, if we ever want to do something similar again, having a security that is identical to what we would be buying may be beneficial.
Your energy transformation fund just reached $15 billion. What is your strategy’s ultimate goal? And how does it fit into the present climate, where there are worries about energy security, given what’s going on in Eastern Europe and the region’s reliance on Russian energy, but also a desire for a cleaner environment and less carbon-intensive energy infrastructure throughout the world?
Flatt: We’ve been in the renewables industry for 30-40 years, beginning with hydro facilities. We’re one of the biggest players in hydro, wind, and solar today, and we’re still expanding. Our energy transition fund is built on this foundation. However, we are also lending money to or purchasing enterprises that produce carbon. For example, suppose we purchase a firm that produces power using coal, but our mission is to transform it to a lower-carbon business over the next ten years. So, it’s not enough to just declare that we’ll stop doing carbon-intensive business. Someone needs to put forth the effort. So, our objective is to assist organizations migrate from here to there using the operational personnel and cash we have on hand. Remember, we can’t all be here, and renewables can’t all be used. As a result, we must assist clients in transferring their balance sheets.
Recently, there was a high-profile planned transaction out of your growth fund, the biggest check from your venture fund, which is to assist with Elon Musk on his purchase of Twitter, giving roughly $250 million in equity for that deal. What was the point of this game? Why should you participate in the Twitter takeover?
Flatt: We’re establishing a growth company. Technology has always played a vital role. In the investing sector, it’s becoming more important. What didn’t make sense to us and our main line companies in many situations earlier was valuation. And nowadays, prices are becoming much more fair. So, I believe it will become much more essential in the future in all of our enterprises because values are genuine. That exact issue you’re referring to, I won’t comment on the deal, but we’ve had a long history with Tesla and Elon Musk via a lot of investments, and it simply grew out of that.
What do you believe his motives are for the agreement, and what do you hope to get out of it? Given the amount of loudness and hairiness.
Flatt: I’m not going to say anything further about it after that. We have a strong connection with him and are supportive of him, but our development team believes it is a successful business.
You’ve been the CEO of Brookfield for over two decades, and you’ve generated enormous profits for your investors. I did some math earlier and it appears like the S&amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp;amp; What do you credit for your success? And do you believe that previous performance predicts future results?
Flatt: The returns are determined by what you invest in and how long you stay with it, and we were fortunate. I’ll take my chances. We were fortunate enough to get in the alternative industry. It’s a fantastic business. Interest rates have dropped dramatically. Money built up in institutional and wealth funds throughout the globe, and we were able to put that money to work by building a company and partnerships. That’s the fortunate part. Then there’s the matter of execution. And we’ve made a lot of little errors, but not many major ones. As a result, the execution has been rather solid. And we persevered with it, which is the key to a lot of success. So far, we’ve had a good run. To the future, I believe this company has a large runway for another 10 years, which is why we’re thrilled and part of the reason we’re dividing the business again is that we see a lot of room for development in the future.