People walk to Brookfield Place off Bay Street on the day of the annual general meeting for Brookfield Asset Management shareholders in Toronto, May 7, 2014.Mark Blinch/Reuters
Brookfield Asset Management Inc. is looking for bigger and longer-term private equity investments as more capital floods into the space.
The Toronto-based alternative asset management heavyweight said Wednesday that it would spin off about 35 per cent of its private equity group into a new publicly traded company called Brookfield Business Partners LP (BBP). The new entity would have a net asset value of about $2-billion.
"BBP should enable us to broaden the spectrum of investments we can make, as pure private equity investing limits us to investments we need to sell within a fund's life," Cyrus Madon, senior managing partner of the Brookfield private equity group, said at the company's investors day on Wednesday. It also frees up capital for Brookfield to pursue new acquisitions in the business services and industrial space.
This will be the fourth Bermuda-based subsidiary launched under the Brookfield Partners LP name, with Brookfield as the general partner. When BBP launches in early 2016, pending approvals, it will run alongside the Property, Renewable Energy and Infrastructure flagship public companies.
BBP will be the primary vehicle for Brookfield's private equity business, and will target at least 15-per-cent returns on capital invested.
The portfolio of assets includes most of Brookfield's existing private equity investments in the business services and industrial operations space, such as cold-storage warehouses, oil and gas exploration and development and construction.
"Private equity is very competitive and we've made a lot of money by giving a lot of attention to our companies," said Mr. Madon, reflecting on how the new BBP vehicle could change investments. "I think we may focus on companies that have more durable cash flows over a longer period of time. Now, they're going to be more expensive than a company that needs fixing. So, I think we'll always do a little bit of both, but for sure we have the opportunity to buy a different type of asset compared to what we would in our private equity vehicles today."
Brookfield will exclude its residential real-estate holdings in North America and Brazil from BBP, since the businesses are more cyclical. Right now, a buoyant U.S. market is leading to more home sales, while economic cooling in Brazil has slowed consumer demand for new homes.
Under the BBP split, current Brookfield shareholders will get a special dividend estimated to be worth about $500-million (U.S.), in the form of BPP units.
Over all, Brookfield predicts that institutional clients will move toward allocating 25 per cent to 30 per cent of the portfolios to real assets in the coming years. As more money flows in this direction, Brookfield can move toward larger funds, allowing the company to raise more money and do larger deals. The company is already setting higher investment targets for its new funds.
"Even greater than 2007 – we see more money coming into real assets today than we've seen ever," said Bruce Flatt, chief executive of Brookfield, at the company's investors day on Wednesday. "Sometimes people worry about that, but in '06 and '07 most of the capital that drove the markets was driven by high leverage and structures that finance on finance. Most of this money today is from sovereign wealth funds, which is a much safer amount of money."
In the last year Brookfield has made several significant investments such as Canary Wharf, wind energy assets and most recently a deal for Australian port- and rail-systems company Asciano Ltd. worth $8.6-billion, plus debt.