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Why Brookfield’s Spin-Off Could Transform It into an Even Bigger Deal-Making Powerhouse

While the name “Brookfield” may not ring a bell to most folks on the outskirts of the real estate and finance worlds like Goldman Sachs or even Blackstone, that could change very soon because of Brookfield’s plans to spin off its asset-management business. Brookfield Asset Management, based in Toronto, has more than $725 billion of assets under management, focusing on a wide variety of areas like real estate, renewable energy, credit, and private equity. Now they plan on splitting up the company to simplify Brookfield’s complex organizational structure in a way that could jump-start growth and transform the giant multinational firm into an even bigger financial powerhouse.

The spin-off has been public knowledge since earlier this year when CEO Bruce Flatt shared news of the plans in a letter with shareholders. As a result of the spin-off, a new publicly traded company will control Brookfield’s fee-generating assets like real estate, renewable energy, and private equity. The strategy is to make Brookfield “asset-light,” a model that investors prefer. Flatt has told investors the unit could have an equity value of as much as $100 billion. Of course, Brookfield has done something like this before. It has a history of building companies and then listing them after they scale.

For example, last year, Brookfield spun off its reinsurance unit, Brookfield Asset Management Reinsurance Partners, through a special dividend to shareholders. The firm has done the same thing with Brookfield Business Partners, its private equity arm, and its renewable energy unit, Brookfield Renewable Partners. In the case of its asset management unit, spinning it off into a new, publicly-traded entity makes sense and could be lucrative. It would decouple Brookfield’s balance sheet from the capital it invests on behalf of clients such as sovereign wealth funds, and it could unlock billions in value from management fees it would generate from customers.

Another reason the spin-off makes sense is that it would simplify Brookfield’s complex organizational structure, thus making it a better sell to investors. Brookfield owns a multitude of assets through a collection of funds and shares in the public companies it controls. For example, Brookfield is one of the biggest commercial landlords in major U.S. markets like New York City and Los Angeles. In NYC, its portfolio includes trophy assets like One Manhattan West and the Eugene rental complex. Brookfield also acquired an enormous retail portfolio after purchasing mall operator GGP in 2018.

But the structure of Brookfield’s organization has made it hard for investors to decipher the company’s value. “You have to go through a complicated analysis to peel back the onion because there are so many layers,” Andrew Kuske, a Credit Suisse analyst, recently said. “A spinoff would make it easier to digest for investors versus trying to tackle all of the components of Brookfield today.” Spinning off the asset management unit would generate steady management fees (something Wall Street loves) and drive higher share multiples rather than income from investment returns, which are considered less predictable.

Brookfield plans to retain a 75 percent interest in the new asset management entity and continue investing its own cash through the manager’s funds. CEO Bruce Flatt has said that the asset management unit will have dual U.S. and Canadian stock listings, a “pure-play” investment firm with an estimated market value of about $80 billion. Brookfield’s rival, Blackstone, has a market value of approximately $115.6 billion, by comparison, making it the world’s largest private asset manager. Apollo Global Management’s value currently sits around $29.12 billion.

Like Blackstone, Brookfield has a vast number of holdings in real estate assets, but Brookfield lags behind Blackstone in some areas. For example, Blackstone has established a private real estate investment trust, BREIT, that has become the firm’s insatiable commercial real estate buying arm, acquiring $125 billion worth of real estate assets as of October 31st. Brookfield sought to develop a similar real estate investment trust last year, but it held only about $500 million in assets, a drop in the bucket compared to Blackstone’s.

Nevertheless, Brookfield is still one of the biggest owners of multifamily and office properties in the U.S. Just like Blackstone, Brookfield doubled down in recent years and throughout the pandemic on hot real estate asset classes like industrial, life science office buildings and data centers. Brookfield was also a contrarian buyer in the office market throughout the pandemic. The company reportedly spent $4 billion purchasing U.S. office properties in 2021. Among the purchases were 12 office properties in Washington, D.C., from WashREIT for $766 million, along with a 25 percent interest in Tower 46, an office skyscraper in Manhattan.

Despite the continued headwinds in the office sector, Brookfield has succeeded with the investments. For example, it’s currently undertaking a $400 million renovation of 660 Fifth Ave. in Manhattan, attracting interest from large office tenants like Australian bank Macquarie and investment management firm Viking Global.

Meanwhile, the spin-off of Brookfield Asset Management has received board, shareholder, and court approval, as well as material regulatory approvals. Brookfield recently announced the new public entity arrangement would become effective by December 9th, a date circled in many investors’ calendars, undoubtedly. The Brookfield Asset Management company will be traded on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol “BAM.” If all goes well, the spin-off will simplify Brookfield’s complicated organizational structure and potentially unlock billions of dollars in value. With its rival Blackstone in its sights, it could be the start of an even bigger arms race between the world’s two asset management behemoths.

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