Till last year, the firm’s investments, including dividends, have returned more than 3,700% since you took over. That compares with about 500% for the S&P 500 Index. You invest in hard assets such as toll roads, airports, ports, utilities and real estate. How have you managed to outperform so consistently? And is this sustainable considering the volatility that we currently find ourselves in?
Bruce Flatt: Our business is about buying, uh, good businesses in good places, holding for long periods of time. We are focused on backbone of the economy across the world. What we have found, is by entering those businesses or buying those type of assets and operating them well and selectively selling them at sometimes greater than what the fair value is very important. There are two things that are highly relevant to most businesses and in particular to what we do. One is the value of an asset, which is generally determinable by the discounted cash flow of an asset and second is the price. But the price, that’s in the stock market is often affected by things which are out of the ordinary. You just saw what happened in the United States recently with regards to Silicon Valley Bank. The stock markets went down by 5% on Friday and 3% on Thursday and 2% on Wednesday. That’s 10% down for the week. But that had nothing to do with value of most businesses. Therefore, the price and value are very different and our goal over time is to make investments where we get good value. So, if we can, we buy assets or businesses when the price is lower than its value and sell them when the value is higher. Or at least when the price is greater than the value.
So, I’d say the returns that we have been generating over the last 20, 25 years has been a combination of that investing style and the building of an asset management business for alternatives.
But the alternative asset management business has been relatively a new phenomenon?
Bruce Flatt: When we started alternatives, there wasn’t really a business. Institutional clients across the world invested originally in bonds, then they invested in equities. And 20-25 years ago, we, and a few others started introducing other products to them. And when I say other products — it’s investments in real estate, infrastructure, renewables, private equity, credit, energy transition all of those types of products. Our returns are both the investment success for our own balance sheet, but also what we have done for our clients, as those clients have institutionalized their business into alternatives as well. I guess we have ridden this wave of institutionalization of alternatives. The number of alternatives when we started out 25 years ago was at 2% and today that 2% has become something like 16%, but for some institutions it’s 60%.
Does the current global volatility throw up a lot of buying opportunities for Brookfield?
Bruce Flatt: The short answer is yes. The longer answer is we’re quite positive on the markets and the environment today. That’s not a common opinion these days. Part of the reason is because of what we do. Part of it’s also the fact that we raised $100 billion of capital last year for investing. We’ll raise another $100 billion this year. So, we have a lot of capital. And the entry point for investments is always important. Both bonds and equities are more fairly valued today than they were before. Growth stocks are more fairly valued today than they were before just like technology’s more valued than were before and PE multiples broadly are more are more valued than they were before. So, it’s a much better environment to enter in for new investments and that presents opportunities because of what I just argued about value versus price. It just means maybe you are buying at a discount to value and at a fair point as opposed to 18 months ago when a lot of things were overvalued in both private and public markets and that potentially compromised returns over a longer term. So, it’s a much better point today.
If you were to buy companies today, which sectors would they be in? And in which geographies?
Bruce Flatt: India for sure. But I will come to that in a bit. We are in 30 countries around the world. What we do is establish a business in a country where we have attributes that we think are favourable to investments over the longer term. We stay and operate in those countries and buy assets in those countries that fit all of our areas of operation, when it makes sense. Last year, we put $60 billion to work across all our businesses. This year I think we’ll probably put $30, $40, $50 billion to work.
If you set up a vast global business across six or seven businesses (verticals), it allows us to respond to opportunities in a flexible manner. So, our funds don’t say, for example, you have to invest in India for this period of time because you have money available for a certain period of time. The number one mistake people make is if they have money and are forced to make investments within a certain period of time. But sometimes it’s the wrong time to invest.
As long as it’s in one of the places that we’ve endorsed as an investment, has investment merit, our funds are agnostic to where the opportunities are. Often, they switch across geographies to markets where the valuations are reasonable and to places where we are doing better.
But inevitably, half of our money goes to the United States. It has the largest GDP, most liquid market, with most companies with the most capitalisation and the most opportunity. And therefore, almost 40 to 60% of every fund goes into the United States, 20% goes to Europe, 20% goes to Asia, India and a small portion to South America. I do think India over the next 10 years will see a dramatic increase in FDI from foreign investors just because of what’s going on geopolitically.
Do you see significant opportunities in China as they are opening up post zero Covid?
Bruce Flatt: Relatively speaking we have a modest business in China. Here in India, we have $22 billion in assets. In China we have something like $15-$22 billion across businesses. So, it’s not big compared to our global business. I’d say globally, people are interested in FDI into India. For China, investors around the world are split into two camps. Those that are interested in China and those that are not. So, our strategy depends on who we invest for. We have the luxury of having many clients and we can change our strategies and fund types to be able to accommodate each of our investors.
The $60 billion that you put to work last year and the investments planned for this year would be predicated upon a low interest rate regime. But that’s changing and inflation is a genuine concern. Would you agree?
Bruce Flatt: Inflation is actually a good thing and most of what we own are positively disposed to inflation. If you buy a regulated utility and you buy it at the rate base and you’re supposed to get an 8% return, it’s an 8% return on a real basis. So, you get 8% plus inflation. And when we bought the asset, we assumed you were going to get a 2% increase in inflation. Well, guess what? We’re getting 6%. And therefore, when you compound at 8% and you add 2% or you add 6% over a number of years, it’s highly positive to your numbers because it compounds.
It’s more expensive to build solar and wind facilities today. It’s, uh, more expensive to build real estate. Ultimately that gets affected by the contract values. In utilities and infrastructure, you earn on a monthly basis whereas in real estate, you actually get it when the lease rollovers happen. Retail sector has been doing very well in the United States in the last 18 months because of inflation. Stores pay a percentage of sales to us as rent. So as the value of the goods they sell is going up, you get 15% of those sales.
None of the investments we have made or will make are predicated on 0% interest rates. They will never be. Now if rates go up by 500 basis points more from here — which they will not — then maybe I think your question would have a different answer. Also remember, interest rate increases are a one-time event whereas real return assets may take a hit on incomes for a short period of time, but then they just keep going. They’re not bonds. If you own a 30-year bond, you lose your value because you have locked in a 2% return for the next 30 years, or seven or five or whatever it is. That’s what happened to these regional banks. But the real return assets, you don’t, the cash flows keep going up, keep compounding away. That’s the big difference in owning these types of assets.
Remember a lot of the assets we have 30-year fixed rate financing, so there’s no increase in financing costs.
Anuj Ranjan: We are an operations-oriented investor. Meaning, across our portfolio, we have about 180,000 operating people, 25,000 here in India. And how we generate our returns is by operating these businesses or assets better. Interest rates and inflation are higher than they were in the past. They’re probably closer to normal or maybe slightly higher than normal today. But for a long-term investor like us, we’re betting on our people’s capability to operate assets or businesses and deliver better returns.
Considering the rates have moved 500 bps, are you surprised there hasn’t been more accidents?
Up until a fortnight, I was surprised there hadn’t been an accident and then I found one. We found a misallocation of capital that got caught out during a period of time of interest rate increases. I take this as a large positive that we’re now seeing. It’s one more example of getting excesses out of the system. And that’s a good thing. We had put too much into the system because we did not know how to deal with deflation. There’s a very simple way to get inflation out of the system, which is to slow the economy and you slow the economy by exactly doing what they’re doing. And sometimes there are some small things that get affected on the way.
How do you see the meltdown of Silicon Valley Bank, Silvergate’s implosion? One-off events or precursors to bigger and macro-level busts? Shares of larger banks including Citi, JPM, Bank of America dropped along with SVB, and so did the broader US markets.
I don’t know if these are one-time events but it’s a small piece of the financial sector in the United States. What’s happening in the asset management, insurance and banking industry in the US is another round of consolidation. Money is flowing into the large players as we have seen it in our funds. You just continue to see this in tougher times. Consolidation to the bigger, more trusted and better brands.
One of the biggest trends has been around globalisation. To what extent do you see this decoupling of supply chains and the China+1 strategy play out in the Brookfield portfolio?
There are three large trends that we’re capitalising on: Decarbonisation… what’s going on around the world of getting carbon out of the system. Deglobalisation to answer your question and digitalisation of everything.
It will take tens of trillions of dollars of investment across the world to get carbon out of the industry. Sixty to 70% of carbon is produced in the power-generation business. And in the next 20 years, we’re going to take coal out of most countries and natural gas out of some.
Digitisation… you see a mobile handset but behind that machine are billions and billions of investments in hardware, in the chips and the software. We paid $8 billion for Jio’s towers. But that’s just one country’s, one operator’s towers. We just put up an $18 billion investment to buy T-Mobile’s towers in Germany. But the data centres, the fibre to the home, the wi-fi systems, like everything behind the delivering data is witnessing a dramatic investment for the past 10 years. With the cloud companies, it’s even increasing.
On de-globalisation, I’d say we went through a 25-year push for many products to be outsourced to India and China, and other countries. Initially, China took large, more sophisticated, electronic and sophisticated parts of the manufacturing value chain and India was originally at the lower end. But India is industrialising too. But with what’s gone on politically in the world, most companies, especially US companies are thinking they need to diversify their supply chains and are diversifying either back to the United States or to places like India, which I think is an amazing opportunity for your economy. Machine goods, semiconductors are going back to the United States. So, we just financed a $16 billion partnership to build a plant in Arizona with Intel. And I think that’s just the start of a big trend of reindustrialisation of the United States.
It’s not that nothing will be built in China going forward. But it will largely be for China, a little bit for exports, but India will be a big beneficiary of this diversification of the supply chain.
Is India doing enough to make it easier to do business here?
Anuj Ranjan: Absolutely. I’d say we have invested about $22 billion largely over the last eight years, and a lot of it has been enabled by many of the positive reforms of the government across real estate, infrastructure and just general FDI investing. Our capital’s been quite welcome and we have so far had a great journey investing here in building up the business.
In the recent budget, they have quadrupled infrastructure spend, and it was really focused on capex. I think they’ve identified the areas that need FDI from groups like us. We as an investor are going to be a beneficiary, I think, of all of these policies that are already in place.
From being one of the largest owners of office blocks in the country to the two Reliance deals, you have made several marquee bets in India. Do you have an India allocation number in mind?
Anuj Ranjan: It’s hard to put a number. But I would say we went from effectively zero dollars invested in the country to $22 billion over eight years. And a lot of that was large-scale transactions. We are investing across all the sectors we’ve already gone into. So, real estate across all the different sectors like offices and hospitality. In infrastructure, we had a road platform. Of course, then we have taken big bets in telecom and in data centre infrastructure. Renewables are a big focus for us globally. We have built 4.5 GW in a measured and thoughtful way. We plan to do a lot more in India, given the size of the market and its growth prospects. We are well positioned to capture a significant part of that growth going forward, both through greenfield development and opportunistic M&A–but we are patient and will maintain that discipline as we grow.
In PE, we continue to focus on technology, financial and business services in a big way. But we can scale all of that up pretty dramatically in the next five years.
Bruce Flatt: I talked about the big focus on the reindustrialisation of the United States but I think an equally sized opportunity is there to help the global corporates come to India and both provide them the operating skills to be able to get plants and real estate and infrastructure and renewables built for them. We deal with all those companies around the world as they use our office buildings but now want to bring plants to countries like India and this is a big investment opportunity for them, for India and also for us. This is going to be an enormous build out and we also have the capital, operating capabilities on the ground here to support it.
You talked about decarbonisation. But that means many things today. From utility scale solar parks to mobility solutions to batteries to green hydrogen. What’s the scope for Brookfield?
Bruce Flatt: The unique thing about wind but in particular solar, in most countries of the world today, it is the lowest cost energy. Period. No subsidies. And that’s a really important thing. People want to do good, but they even want to do good more when it’s the lowest cost. You need to assist companies to decarbonise. We raised a fund last year for $15 billion. We’ve been putting it to work. Our fund is for tradition transitioning to lower carbon. We’re helping steel companies decarbonise. We are helping industrial companies decarbonise. We’re the largest counterparty to Amazon to get carbon out. Our goal is to help them give them money and give them operating skills to be able to decarbonise.
We’re not early-stage investors in any major degree, not because we don’t want to be but our skill is putting large sums of money to work and operating them well in major countries in the world. And so, I would say hydrogen will come, batteries are coming. We’re using them all. We’re funding some things. We are funding battery projects, we’re putting batteries with our solar facilities, but we’re doing all those things in small degrees until we know it’s economic and we can make money. And at that point, we can come in. And we did that with solar. We started small but ramped up big.
You are among the largest landlords of offices worldwide. But post-Covid are offices still attractive?
Bruce Flatt: I will tell you what has changed. Office rents in high-quality office properties are more desired, fuller and going at much higher rents than in were pre-Covid. The disparity between good and bad has always been there but it’s even greater today as there is a flight to quality for everything.
After selling your Indian road portfolio last year, how are you planning to bulk up your infrastructure vertical. Will highways still be at the key investment thesis or newer areas like ports, data centres etc, be the next big growth opportunity?
Anuj Ranjan: We are one of the largest infrastructure investors in the country, and we expect many new opportunities to emerge from the “three D’s”: digitalization, decarbonization, and deglobalization. India presents a tremendous opportunity for investment around these strong thematic tailwinds, and across all these sectors. We will continue to look at all assets on both a risk-adjusted and absolute return basis where our operations-oriented approach can add value.
You have 2 successful and scale InviTs with Reliance Industries. Are you looking to replicate that with other infrastructure developers, conglomerates or build ground up or buy into existing InvITs?
Anuj Ranjan: Given that we now manage two large Invits, we are very familiar with the structure, and are flexible. Buying into a formed existing Invit is easier from an execution timeline perspective, but building Invits is not challenging for us at this point.
Are you actively looking at opportunities that are emerging due to the govt’s asset monetisation exercise. Hotels like Ashok, Concor, Power Trading Corporations, airports are all primed for divestment? Do they interest you?
Anuj Ranjan: We like areas where we can deploy capital at scale, manage operations through our in-house expertise and add value. We are excited for the initiatives from the National Monetization Pipeline and National Infrastructure Pipeline as and when the government brings them to market.
Your private equity business in India is relatively young and smaller compared to your peers. How are you planning to ramp it up in the coming years? How will Brookfield’s private equity strategy differ from other bulge bracket PE firms?
Anuj Ranjan: Our India private equity strategy is able to leverage the Brookfield ecosystem very well, and we want to back amazing companies and management teams where we can add value. Today we are focused on buyout deals and providing strategic capital solutions in specific sectors where we have deep operational expertise, including business services, industrials, technology, and financial services. We have a strong team on the ground and we have had early success in our investments. We now believe that we can significantly scale our current platform.
Our PE business has had real success in India, and the challenges at Indostar have been resolved. It has not dampened our appetite to grow private equity at all. We have continued to build deep operational expertise, and this gives us confidence that we can create value across situations and market cycles.
Private credit has for a long time been called a massive opportunity in India but the market growth has been lacklustre. You have been playing in this market for a while now, what has been your experience, what are the challenges that you see for growth of private credit business here, whether performing or non-performing credit?
Anuj Ranjan: We have established a strong track record with our Special Investments business in India. There is a real opportunity to bridge the gap between private equity and traditional Bank / Non-Bank (NBFC) credit. We see a need for structured & flexible capital solutions to meet corporate objectives, including carveouts, stressed situations and value unlocking by conglomerates. We allow these companies to drive growth without relinquishing control and share our global best practices with them. As the market matures, we expect our Special Investments business to scale significantly in the region.