No. 44: Brookfield Q1

Brookfield Corporation has been firing on all cylinders. It amazes me how long the runway for PE firms is, and how they earn supernormal returns year after year.

Insurance

Sachin Shah, who heads the reinsurance division explains the economics behind their business of selling annuities:

As we set out to build the business, our focus, as always, was on compounding capital at 15% to 20% returns on equity over the long term while managing downside risk. Today, in the United States, there is a significant shortfall in retirement funding for aging populations to the tune of a $7 trillion deficit. There are approximately 60 million people in the U.S. who are 65 years or older, representing 1 out of every 6 people. 100 years ago, that number was 1 out of every 20 people. And over the next 2 decades, the U.S. will add another 25 million people to that aging cohort. Accordingly, as the population gets older in the Western world, the retirement deficit that exists today will only compound.

Furthermore, less than 50% of U.S. workers qualify for retirement benefits through their employer, putting significant pressure on government entitlements. As a result, the demand for private sector solutions that provides stable annuity-like income for an aging population are not only large today, but will grow well into the future. Accordingly, in 2023, record annuity sales surpassed $385 billion in the United States.

Managed funds love to offload their liabilities that they owe retirees to Brookfield in exchange for Brookfield paying something like 3-4% to take on the obligation. What this means is that Brookfield can borrow money at 3-4% for roughly 10 years - dirt cheap in today's environment!

So cheap in fact, that until now Brookfield has been able to park the money in US short-dated treasuries and earn a spread of 2% with no risk. In future, they can plug the low-cost debt into their credit platform (including Oaktree and Castle Lake), or replace debt from their property portfolio, earning management fees and higher yields.

Brookfield recently closed on the acquisition of $100bn pension liabilities, and is likely to be able to raise $20bn per year further. Management estimates that they can take the earnings of the division from $700 to $2bn by 2028. Incredible!

Private Equity

Question: If you had a $300k+ salary managing some sort of pension fund with little to no effort, and enough time to play golf in the afternoons, what would you do?

I would personally do the following:

1) Thank the God above for this gravy train.

2) Create a network of relationships and "back-scratching" arrangements that ensure it's hard for me to get fired.

3) Cement Point No. 2 by hiring an investment manager that (A) lowers my volatility by not having to regularly mark their assets to market, and (B) is a large firm that everyone else hires, so I can't be blamed for doing something unconventional that didn't work.

Brookfield basically solves Point No. 3 for the average large fund manager looking to

(A) not trail peers AND

(B) not be socially excluded from industry gatherings for not having a best-in-class PE allocation.

I see Brookfield Asset Management getting larger over time as they take on funds from other asset managers worried about not having the same PE allocation as peers. Their performance obviously matters, but not as much as the industry relationships and brand they form.

All of the above leads me to believe that Brookfield Corporation has a large runway ahead, and trades at a discount to fair value despite having run up 50% since November 2023. Company management believes in the discount too, buying back $700M worth of shares YTD.