Brookfield Hunting Amid High U.S. Dollar, Market Volatility

  • Currency creating some temporary headwinds as profit falls
  • Volatility creating opportunities to buy alternative assets

Brookfield Asset Management Inc., Canada’s largest alternative-asset manager, is taking advantage of a lack of capital in emerging markets, declining commodity prices and the strong U.S. dollar to snap up assets and high-yield opportunities around the globe.

“The same themes exist today as they had over the past few years, except they’re much more significantly accentuated today,” said Bruce Flatt, Brookfield chief executive officer, on a conference call Friday.

“Probably the biggest one that has changed is the oil and gas markets,” he said, adding that this is creating a lot of opportunities around pipelines and other infrastructure.

The current selloff in bond and stock markets around the globe is also presenting an opportunity, in particular in the U.S. where most of the credit markets are typically publicly listed and can be easily purchased on the second-hand market as opposed to Europe where it’s a bank market, Flatt said.

“Everything in the high-yield market has gapped out,” Flatt said, referring to the premium investors charge to hold the debt of high-yield rated companies over ultra-safe government bonds. That premium is at its highest level in almost five years, according to Bank of America Merrill Lynch data.

Shares in the Toronto-based company rose 6 percent in New York Friday to $28.96 a share as of 11:26 a.m., the largest one-day gain since August 2011.

Dollar Headwinds

The strong U.S. dollar was creating some temporary headwinds for its global businesses as Brookfield’s income fell 30 percent in the last quarter ended Dec. 31.

Brookfield’s hedging strategies offset some of the impact of the strong U.S. dollar in most jurisdictions, except for Brazil, where the company was unhedged, Flatt said. He said he hoped to make back some of the Brazilian losses through other means.

In essence, he said Brookfield has been selling U.S. dollars in this more mature stage of the U.S. dollar bull run, and buying back into assets in their local currencies such as Australia and Canada.

“We had many of our assets hedged and most of this short-term negative detraction from results will shortly be over,” he said.

Quarterly Results

Brookfield reported net income of $1.19 billion, or 66 cents a share, in the fourth quarter ended Dec. 31, versus $1.7 billion, or $1.06 a share a year ago. Funds from operations grew 83 percent to $981 million, including $421 million in divestitures, during the quarter from a year ago while revenue increased 18 percent to $5.54 billion. The firm said it had about $225 billion in assets under management at the end of the quarter compared with $200 billion a year ago.

Strong results from the commercial property and residential division, coupled with a rise in asset management fees led to a “consistent and solid quarter,” Mark Rothschild, a Toronto-based analyst with Canaccord Genuity, said.

“While global economic concerns have increased, BAM is well positioned to grow its cash flow in future years,” he said in a note to clients. “Many of its most significant assets were acquired through times of financial crisis and the company has the liquidity to continue to acquire large portfolios.”

Buying Opportunity

Volatility is creating plenty of opportunity for acquisitions, particularly in Brazil, Flatt said on the call. The company said it has been bulking up its office in Shanghai and will add to its office in Dubai to take advantage of the opportunities in South Asia and the Middle East.

Brookfield said it deployed roughly $21 billion in 2015, including for several signature assets, such as Canary Wharf and Center Parcs in the U.K., TDF Communications in France and Isagen hydroelectric in Colombia.

The company is also in the midst of trying to take over Australia’s port and rail operator Asciano Ltd.

Business Partners

“Compared to the last few years, we are seeing very substantial numbers of investment opportunities that meet our investment criteria,” Flatt said.

The company also said it would push back the spin out of its private equity arm, Brookfield Business Partners LP, to the second quarter of 2016 from the first quarter.

The company is currently raising about $22 billion for its flagship funds that are expected to close in the first half of the year, it said. It also plans to launch funds in its public securities and private fund business, including core funds and credit funds, to take advantage of the current opportunities.

There has been a tremendous amount of interest in the funds as institutional investors look to build their portfolio of real assets, Flatt said. He said there was still a significant opportunity in places, like Asia, to continue to grow the number of institutional investors.

“There are parts of the world where we think the allocation percentages are only starting,” he said. “Asia would be one of those. They’re very underallocated to these types of products and as the insurance business in China, for example, grows over the next 25 years, there will be very significant percentages allocated to these types of assets.”

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