Brookfield profit drops 39% as rates rise

Brookfield Asset Management Inc. BAM-AT CEO Bruce Flatt says inflationary environment is improving the value of its investments – but the company’s second-quarter results show the company isn’t completely immune current market conditions.

The company reported a 39% decline in net income to US$1.48 billion, partly due to lower gains on the sale of assets and higher interest expense which exceeded revenue gains.

The company’s funds from operations measure, which removes a number of non-cash items from the calculation, and the company’s “distributable earnings”, which removes additional expense items and adds back dividends from Brookfield’s investments, decreased by more modest amounts.

Brookfield recorded interest expense of US$2.41 billion in the quarter, up 31% from the second quarter of 2021. The amount of corporate borrowings on the balance sheet increased 11% to 12, 05 billion dollars.

“Stress on interest rates caused significant market disruption in the second quarter of 2022, but it’s important to keep this in context,” Mr. Flatt wrote in his letter to shareholders, addressing the rate hikes. of interest in a macroeconomic context.

Despite two U.S. Federal Reserve rate hikes, and more to come, according to Mr. Flatt’s theory, “rates should settle at historically ‘low’ levels, which should still be very business-friendly. …balance sheets for individuals and businesses are in a strong position to weather this change, and before we know it, we’re expecting a recovery.

Brookfield has billions of its own money invested in giant portfolios of what it calls “alternative assets” – real estate, infrastructure, energy and distressed debt. Brookfield also attracts outside funds, from institutional investors and the wealthy, to invest alongside it. The assets it buys are placed in partnerships, some of which are traded on US and Canadian stock exchanges, and others are private funds.

“With many of our infrastructure, renewables and real estate assets positioned to benefit from inflation, our revenue streams and cash margins increase as the cumulative effect of inflation sets in” , Mr. Flatt wrote. “With stock markets down 20-30% from their peak and credit markets ‘turning sideways for many corporate borrowers,’ he wrote, ‘the investment environment for corporate as ours continues to grow stronger. We are therefore investing capital with excellent returns, well above those we would have otherwise obtained under conditions such as those encountered at the end of 2020 and 2021.”

Indeed, Brookfield appears to have no trouble attracting dollars from current and new customers. Brookfield said it saw record inflows of $56 billion since the end of last quarter. Fee bearing capital – the amount of money from outside investors that Brookfield manages – was US$392 billion as of June 30.

During the quarter, Brookfield closed its Global Green Energy Transition Fund at US$15 billion. Mr Flatt said Brookfield was completing an initial closing for its latest US$20 billion infrastructure fund and US$8 billion private equity fund. Brookfield also raised around US$14.5 billion for an opportunistic real estate fund.

Flatt said a US$16 billion opportunistic debt strategy fund will soon be primarily invested, paving the way for Brookfield to launch another.

Brookfield announced in May that it would divest a new asset management business to shareholders by the end of the year, creating a roughly US$80 billion entity that will pay out most of the dividends its shareholders receive. currently. The company invests for itself, which requires it to raise billions of dollars in capital, but also manages money for others. Fund managers who need little capital tend to get higher valuations from investors, a benefit Brookfield wasn’t getting with the two companies rolled into one.

Mr. Flatt said in his letter that former Bank of Canada governor Mark Carney, who joined Brookfield as an adviser to its transition funds, will serve as chairman of the new fund manager’s board, which will will be called Brookfield Asset Management Ltd.

Mr. Flatt will serve as CEO of the asset manager while remaining CEO of the current company, which will be renamed Brookfield Corp.

The separate asset management company would add to a dizzying array of Brookfield entities available to investors. Three limited partnerships – Brookfield Infrastructure Partners LP, Brookfield Renewable Partners LP and Brookfield Business Partners LP – trade on the New York and Toronto stock exchanges. Brookfield Infrastructure Corp., a subsidiary of the Partnership, is listed on the NYSE. Brookfield Asset Management Reinsurance Partners Ltd. trades on both exchanges. And the Brookfield Global Infrastructure Securities Income Fund trades in Toronto.

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