Q4 2023 Earnings Transcript

BROOKFIELD ASSET MANAGEMENT LTD

TRANSCRIPT: Q4 2023 CONFERENCE CALL WEBCAST

February 7, 2024, at 11:00 a.m. (EST)

Corporate Speakers:

• Jason Fooks, Senior Vice President, Investor Relations
• Bruce Flatt, Chief Executive Officer
• Connor Teskey,President
• Bahir Manios, Chief Financial Officer

PRESENTATION

Operator

Hello. And welcome to Brookfield Asset Management's Fourth Quarter 2023 Conference Call and Webcast. (Operator Instructions) I would now like to hand the conference over to our first speaker, Mr. Jason Fooks, Senior Vice President, Investor Relations. Please go ahead.

Jason Fooks, Senior Vice President, Investor Relations

Thank you for joining us today for Brookfield Asset Management's earnings call. On the call today we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, our President; and Bahir Manios, our Chief Financial Officer.

Bruce will start the call today with opening remarks; followed by Connor, who will talk about our growing fundraising capabilities. And finally, Bahir will discuss our financial and operating results for the business. After our formal comments, we'll tuthe call over to the operator and take any analyst questions.

In order to accommodate all those who want to ask questions, we ask that you refrain from asking more than two questions at one time. And if you should have additional questions, please rejoin the queue, and I'll be happy to take additional questions at the end if time permits.

Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law.

These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events and results may differ materially from such statements.

For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website. And with that, I'll tuthe call over to Bruce.

Bruce Flatt, Chief Executive Officer

Thank you, Jason. And welcome to everyone on the call. Our results were strong in the fourth quarter, our best quarter in an overall excellent first year for Brookfield Asset Management. In total, we raised $140 billion of capital which includes $93 billion raised over the past year and $50 billion coming from the pending close of the AEL insurance account with Brookfield reinsurance. We were successful fundraising across our flagship funds, including new records for our infrastructure and private equity franchises.

This past year, we fund raised across a broad set of complementary strategies and with an increasingly diversified set of global investors. We also launched a number of new funds, most notably Oaktree's Lending Partners Fund, which shows promise in evolving to be a 6th flagship series for us. Our goal is to always have a focus on providing exceptional value to our clients. Our goal has always been to generate strong risk- adjusted returns by acquiring assets for value, leveraging our operational capabilities to grow cash flows and compounding capital over the long term.

By staying ahead of market trends and continuously innovating, we've been able to help our clients achieve their investment objectives in ways that truly matter to them.

At the same time, this past year has been about making the necessary investments in our platform to position us for long-term success and growth. We've been expanding our global fundraising organization as well as building our capabilities within insurance and private wealth with the expectation that they will grow to become meaningful contributors to our annual fundraising in the near term.

Fee-related earnings grew 6% and to $2.2 billion and the distributable earnings grew 7% also to $2.2 billion. The significant capital we raised over the past year sets us up for strong growth in 2024 and with much of the investment in our platform complete, our cost growth should moderate.

The combination of faster revenue growth and slower cost growth should mean a strong year for FRE and DE growth. More broadly, it appears that inflation has tempered. Interest rates have peaked, and the Fed soon will begin easing rates. Markets struggle in the face of uncertainty, and these actions signal improved stability resulting in increased investor confidence in pricing risk and therefore, enhance liquidity to capital markets. Transaction volume should pick up as well, which will enable more managers including us to monetize investments, retucapital to partners and in turn, enable those

partners to reinvest in private funds for what should be an excellent environment for investing.

We are going into this year with more than $100 billion of dry powder across our businesses despite investing over $50 billion last year, one of our most active years of investing. We believe the environment will lead to continued consolidation in the industry. This is a theme you've heard us talk about a lot before. We participated in this consolidation five years ago with our Oaktree partnership, and we continue to look at strategic opportunities to further broaden and strengthen our franchise.

This tend towards consolidation is especially true for areas of the alternative asset management space that are most in favor by investors and should attract more capital. Infrastructure, renewable power and energy transition are expected to be among the fastest-growing alternative asset sectors for very good reason. Investors continue to allocate to the space because these are assets that can deliver four things all investors see. Market growth, principal safety in uncertain times, inflation-protected cash flows and long-term capital appreciation.

We were an early mover into these areas after we identified the decarbonization, deglobalization and digitalization were megatrends that were shaping the global economy. Governments, corporates and other stakeholders have made commitments to net zero targets and are grappling with energy security, supply chain resiliency and meeting the exponentially growing demand for data. These challenges will require trillions of capital investment and our infrastructure renewable power and energy transition businesses are well positioned to deliver solutions.

Today, we manage nearly $300 billion of assets across these businesses, making us the largest and most experienced in the space. We've used this first-mover advantage to build critical expertise, deep relationships and we use our scale and source proprietary deals to pursue investment opportunities that are either too large or too difficult for most investors to execute.

We believe that our scale, diversity, reputation and strong track record distinguish us in these areas, and we continue to invest in our franchise and strengthen our brand, and we believe we'll come out of this period of consolidation even more dominant than we entered. With that overview, let me tuit over to Connor to speak about the capabilities and strategy of our fundraising platform.

Connor Teskey, President

Thank you, Bruce. Next, we will speak to our operations and how we have scaled our business, expanded the breadth of our product offerings and enhanced our capabilities across capital-raising channels.

Today our diversity across asset classes, product strategies and fundraising sources enables us to raise and deploy capital more consistently year-to-year and in different market environments. This is increasingly a key differentiator in our franchise.

This past year is a good example of how our partnership approach and investment track record have allowed us to raise larger flagship funds and deliver on our ambitious capital raising targets. At the same time, we have been expanding and diversifying our suite of complementary funds.

Today we have over 100 active funds across our business that cover a wide range of asset classes, products and strategies, many of which we are fundraising for at any given time. In addition, we've also been building out our fundraising capabilities across an increasing number of channels.

The result is that we can expect to raise approximately $75 billion annually, separate and apart from our flagship funds, which are typically raised every few years. That should allow us to annually raise $90 billion to $100 billion on average at this point in time. Let us break down that figure a little bit.

While most of our fundraising will continue to be driven by our institutional sales team and by our public affiliates, we are continuing to grow other channels to augment and diversify our fundraising. A good example of this is the growth of our insurance solutions channel. As Bruce mentioned, we expect BNRE's acquisition of AEL to close shortly, which will bring our fee-bearing insurance capital up to more than $80 billion from approximately $35 billion today.

At the same time, Brookfield Reinsurance will become one of the largest writers of annuities in the United States. And by employing the same operational enhancements utilized following the acquisition of American National a few years ago, we expect to meaningfully grow AEL's pace of annuity underwriting. And over time, we should be able to organically raise $15 billion to $20 billion of insurance capital annually. And that would be independent of any additional insurance acquisitions that BNRE may do.

We have also been building Brookfield Oaktree Wealth Solutions, or BOWS, which is our private wealth business. We have approximately 150 dedicated employees across 10 countries to meet the growing needs for alternative assets in the private wealth market. We have partnered with more than 50 wealth groups worldwide in delivering institutional quality investment strategies to their clients. We currently have five perpetual strategies specifically developed for private wealth investors, across credit, real estate and more recently, infrastructure.

At the beginning of last year, we launched the Brookfield Infrastructure Income Fund to investors in Asia Pacific and Europe. And recently, we launched the strategy in the United States. The strategy has been very well received, and we've raised almost $2

billion over the past year. In total, we've raised approximately $7 billion of capital through our private wealth channel last year. And over time, we expect this channel to grow to $12 billion to $15 billion of fundraising annually.

Switching gears now to product development. Core to our success has been our adaptability to the ever-changing market environment and our focus on adding new products and solutions for our clients. The majority of our new products come organically from in-house product development. Our product development function works across our businesses and investor segments to leverage our investment expertise and global presence to develop new solutions to meet our clients' investment objectives.

This serves as an important competitive advantage, allowing us to differentiate our platform from our competitors. It enhances our relationships with clients because we can create tailored strategies to meet their needs and proactively adjust to ever- changing market conditions. As a result, we expect the role of new product development to be an even bigger driver of our business going forward. Some of the new products and strategies we've recently announced include a EUR 10 billion private investment-grade debt fund with the purpose of originating and distributing high-quality private credit investments.

This initial fund will launch with EUR 2.5 billion of seed funding in part from Brookfield reinsurance. Another example is a joint venture with Sequoia Heritage called Pinegrove, which will focus on acquiring secondary funds in the venture capital and technology sectors. Pinegrove is raising an inaugural fund in the first half of 2024, with $500 million in seed capital collectively from Brookfield and Sequoia.

We also continue to leverage our deep relationships with investors in the Middle East and are launching a Middle East private equity fund this year as well. This region continues to be one of the fastest growing in the world, and we have established ourselves as the best positioned sponsor in the market. Also with our private equity franchise, we'll be launching a newly formed financial infrastructure platform. This strategy focuses on opportunities in digital payments and services, a key pillar in the digitalization of the global economy over the coming years.

Lastly, we also recently announced the launch of our multibillion-dollar catalytic transition fund, CTF in partnership with UAE's ALTÉRRA. ALTÉRRA committed $1 billion of seed capital into this fund which will have a differentiated and focused mandate on raising and deploying capital exclusively in emerging and developing markets with a focus on energy transition, industrial decarbonization, sustainable living and climate technology.

In addition to product development, at the same time, we always seek to strategically and selectively invest in and partner with managers that have capabilities that are

complementary to our platform. We do so when investing can be done accretively and when building a product organically would take too long. This can be done at scale like we did with Oaktree in credit, and over the past five years, we've partnered in many ways, including building our private wealth business, scaling our insurance business and sharing valuable insights across our portfolios.

However, we also selectively make smaller tactical investments in managers that we believe can help scale and are complementary to our business. One example of the latter approach is our 50% interest in LCM, a European-based private credit alternative asset manager. Since we began our partnership with the firm, LCM has tripled the size of their main funds in addition to growing across their platform. We think there is an opportunity to do more of these tactical acquisitions. These will be managers that can be assisted by the overall scale of our business and capital and managers whose growth can be accelerated when brought into the Brookfield ecosystem.

Most will benefit from our insurance assets under management and from our client relationships. In addition, we can provide these managers with the proprietary data insights that we gather from our more than $900 billion of assets under management. In order to manage our growing private credit capabilities across Brookfield, notably Oaktree, LCM, our SocGen partnership and our insurance investment strategies, we recently placed all of our credit strategies under a new credit group, which is led by Craig Noble.

Craig is a Brookfield veteran. He's been with us for approximately 20 years and was most recently responsible for our institutional and wealth fundraising. Bringing all of our credit strategies together with our newly formed credit group, allows us to work effectively across our credit teams, provide excellent returns and maximize our ability to create value for our clients.

We are confident that credit will be a meaningful driver of BAM's growth over the next decade, given the industry tailwinds and our collective focus. This adjustment will help us achieve that. We will now tuthe call over to Bahir to go through our financial and operating results for the quarter.

Bahir Manios, Chief Financial Officer

Thank you, Connor. And good morning, everyone. So for this morning's call, I'll focus my remarks on three areas, starting with a discussion of our financial results for 2023 and I'll then do a bit of a recap on our capital raising efforts for the year and then conclude by touching on the outlook for 2024.

So first, just on financial results, fee-related earnings, or FRE for 2023 were $2.2 billion, up 6% from the prior year. This increase was primarily the result of capital raise for the various flagship funds, which we raised during the year, including our fifth infrastructure

fund and six private equity fund as well as capital that we deployed within our various credit and complementary funds where we eafees on invested capital.

These increases were somewhat offset by lower catch-up fees and transaction fees, lower fees associated with our permanent capital vehicles and increased costs as we scaled up the business considerably in 2023. Distributable earnings for the year were also $2.2 billion, up 7% compared to 2022. This increase was primarily attributable to the increase that we had in our FRE. We ended 2023 with $916 billion of AUM or assets under management, up $126 billion or 16% from the end of 2022.

Our fee-bearing capital currently sits at $457 billion, up $39 billion and 9% compared to the prior year and will increase to over $500 billion with the shortly anticipated AEL deal. Our fee-bearing capital benefited from strong inflows as well as capital deployed during the year in addition to higher valuations on our permanent capital vehicles. This was somewhat offset by capital that we returned to our clients during the year.

Also during the year, we deployed $58 billion of capital in investments, recorded over $30 billion of monetizations across the business and ended the year with $107 billion of uncalled fund commitments.

Now turning to fundraising and as Bruce noted in his remarks, we had inflows of $93 billion over the past year, which will soon be over $140 billion once the AEL transaction closes and we get the approximately $50 billion of assets that come with this transaction that we will be managing. The $93 billion of inflows were spread across approximately 50 strategies as well as $13 billion of inflows coming from Brookfield's reinsurance business.

We've held several large fund closes since our last earnings announcement, raising $33 billion of capital. The most significant fundraising updates and deal activity since the beginning of the fourth quarter include first, within our infrastructure business, where we have two updates. In December, we held the final close for the fifth vintage of our flagship global infrastructure fund bringing the total strategy size to $30 billion. With approximately 200 investors committed to the fund, this fifth vintage is 40% larger than the predecessor fund.

We are now approximately 40% deployed across six large-scale assets, and the momentum on the capital deployment front is very strong. Second, we held a final close for our infrastructure debt fund for a total strategy size of over $6 billion. Over 60% of the investors in this fund are new to the strategy showcasing Brookfield's leadership position in the infrastructure debt space.

Within our renewable power and transition business, we recently finalized the first close for the second vintage of our flagship global transition strategy at $10 billion. In the fourth quarter alone, we raised over $6 billion, including an aggregate $3 billion

commitment to our transition strategies received from ALTÉRRA. In real estate, we are completing the first close for the fifth vintage of our flagship real estate opportunistic fund strategy at $8 billion and expect the final close later in 2024.

In our credit business, Oaktree raised $30 billion across its franchise in 2023, including almost $10 billion in the fourth quarter. The 12th vintage of our opportunistic credit fund raised $2 billion in the fourth quarter, and our Strategic Lending Partners fund raised $1 billion, bringing the fund sizes to $8 billion and $4 billion, respectively, at year- end. Oaktree has a robust pipeline for additional private credit fund raising, and we expect to complete the fundraise for these funds later in 2024.

Now turning now towards our outlook for 2024, and as Connor highlighted, should be another very strong year on the fundraising front as we have four flagship funds that are still in the market and approximately 50 strategies that we have either started to raise money for or expect to launch in the very near future. This should mean that we're in a good position to raise another $90 billion to $100 billion of capital in 2024, and this excludes the AEL acquisition as well as any of the capital that we raised as part of our 2023 plans that slipped into January of this year.

We also have over $100 billion of dry powder available for deployment in what we expect should be a very attractive environment for investing. All of this should drive significant growth in our fee revenues in 2024. At the same time, as previously mentioned, we worked hard in 2023 to build much of our investment teams and infrastructure for all these new fund strategies that Connor touched on. Much of that investment is now complete, so we expect our expense growth to moderate in 2024, resulting in a sizable improvement to our margins across the business.

So with all that said, and as we highlighted during our call last quarter, we expect to generate outsized growth in our fee-related earnings in 2024, and so with that as a backdrop, in addition to our balance sheet, which has close to $2.7 billion of cash and equivalents and no debt, I'm pleased to report that the Board of Directors has declared a dividend of $0.38 per share for the first quarter of 2024, payable on March 28th to the shareholders of record as of the close of business on February 29. This dividend increase represents a 19% annual growth rate, which is at the high end of our 15% to 20% target range for annual dividend growth that we set out when we formed the company a year ago.

This dividend reaffirms our conviction around our outlook for earnings growth for the next year and beyond. And so with that, that wraps up our collective prepared remarks for this morning. Thank you for joining the call, and we'll now open it up for any questions. Operator?

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) Our first question will come from the line of Brian Bedell with Deutsche Bank.

Brian Bedell, Deutsche Bank

Just to clarify on the fundraising outlook for '24. And I appreciate all the comments on the detail. I count about $110 billion potentially with another $35 billion or so to go with the flagship. So just wanted to see if that seemed correct? And is the $10 billion transition first close, is that all in calendar '24? Or was some of that in the fourth quarter?

Connor Teskey, President

Thanks for the question. I'll maybe take that in two parts. The first maybe to answer your second question there. What happened at the end of 2023 is we completed our fundraising, but almost entirely to service some of our largest LP partners around the world. They essentially committed to a number of our funds in 2023, but they needed to utilize 2024 allocations.

So we did the fundraising work in 2023, and we closed it in the first couple of weeks of January. And that's what causes some of the slip from Q4 into the early part of the year. We are not double counting those numbers when we give our outlook for 2024. We are treating that as 2023 raised capital. And therefore, as we look ahead to this year, do very much expect it to be in line with that, call it, run rate average of somewhere between $90 million and $100 million, excluding the increase due to AEL closing.

Brian Bedell, Deutsche Bank

Got it. That's super clear. And then just as a follow-up on insurance. I appreciate the color there on the $12 billion to $15 billion of annual annuity production. Just I guess, maybe longer term, what's the appetite to do even more deals over time at the parent, the capacity at the parent to do more insurance deals and both struck this division even to a larger extent and expand that $12 billion to $15 billion in future years.

Connor Teskey, President

Great question, Brian. And obviously, that will be update -- that will be up to the team at BNRE. But what we would say is with the upcoming closing of the AEL transaction, that business has very, very significant scale in the United States and becomes one of the

market leaders and can deliver tremendous amounts of organic growth very accretively. Therefore, if BNRE was to consider further deal activity, we do expect that they may consider alternative markets beyond simply the United States.

Operator

Our next question will come from the line of Cherilyn Radbourne with TD Cowen.

Cherilyn Radbourne, TD Cowen

Connor, I wanted to start with a question for you. In the BGTF press release earlier this week, you were quoted talking about how one of the emerging trends in transition investment involves supplying renewable power to the data and technology sector. And I was just hoping you could elaborate on that a little bit and talk about how much of the second fund do you think will be devoted to that type of activity?

Connor Teskey, President

Love that question. Thank you. Maybe just to take a step back and lay the groundwork a little bit. There's not much doubt that the leading technology companies around the world today are the largest and fastest-growing businesses. And the way those businesses are growing is through cloud and AI and the way to deliver cloud and AI is through the build-out of more data center capacity.

This obviously presents a tremendous opportunity for our infrastructure business and its leading data center capacity or its leading data center platform. But perhaps one thing that we feel is not entirely recognized is with the new large-scale data centers that are required to support the growth of cloud and AI, these are very large computationally intensive and energy intensive. And therefore, putting one of them on a power grid has a destabilizing impact and the large tech companies want to put multiple data centers on each power grid around the world.

And therefore, increasingly in order to get your data center permitted, you have to come with a power solution as well. And in an indirect way, power is now on the critical path to growth for the large tech companies.

And this is a real opportunity for Brookfield because we are perhaps one of, if not the only provider who can provide not only scale data center capacity, but also scale clean energy solutions on a global basis to enable the growth of these large tech companies. And this is not a market opportunity for the future, this is a market opportunity right now. It lends itself to not only those that have the capital and the capabilities, but also those that put the work in, in the past and have the platforms and the pipeline available to service these growing technology companies.