Canadian alternative asset manager Brookfield Asset Management (NYSE: BAM) has a history of creating value for investors, delivering a 16% average annual return over the last 20 years. One of the drivers of its ability to consistently generate high-level returns is that it focuses its investments on assets that it can buy at a discount to replacement cost and where it can leverage its operational expertise to get these businesses performing at a higher level.
In addition to investing its own capital, Brookfield manages money on behalf of others, earning fees in the process. Those payments enhance its profitability, enabling the company to achieve higher returns. That's evident by looking at its total return potential versus that of its infrastructure arm, Brookfield Infrastructure Partners (NYSE: BIP). While that entity should generate an excellent blend of growth and income in the years ahead, its total return likely won't match that of its parent.
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The bull case for Brookfield Infrastructure Partners
Brookfield Infrastructure Partners has expanded at a rapid rate over the past few years, growing primarily through acquisition. However, even better days appear to be up ahead because the company has an extensive pipeline of organic growth projects underway. Overall, it has $2.4 billion of projects under construction and could sanction up to $1.5 billion more over the next year. Those organic expansions, when combined with the embedded earnings growth of its existing portfolio, should increase its funds from operations by a 6% to 9% annual rate, which should fuel a similar rise in the company's distribution to investors.
Given the company's current yield of 4%, this forecast implies that Brookfield Infrastructure Partners can deliver a 10% to 14% total annual return to investors. Meanwhile, it could further juice those gains by continuing to make high-value acquisitions. It already has more than $200 million of deals in the pipeline and is always on the prowl for additional opportunities.
The bull case for Brookfield Asset Management
Over the past few years, Brookfield has refocused its attention on its asset management platform. One of the initiatives it has undertaken to streamline its focus is spinning out its investments into publicly traded vehicles. It created Brookfield Infrastructure Partners to grow its infrastructure business, Brookfield Renewable Partners (NYSE: BEP) to build its clean energy platform, Brookfield Property Partners (NYSE: BPY) to house its vast real estate holdings, and Brookfield Business Partners (NYSE: BBU) to own its private equity investments. That said, one of the benefits of investing in Brookfield Asset Management is that investors gain access to the upside of all four platforms. That diversification gives them more ways to win and should smooth out returns.
Another benefit of investing in Brookfield over one of its listed entities is that its asset management arm collects substantial fee-based income from managing its public affiliates and the capital of investors in its private funds. Consequently, the company should generate a much higher total return when we add the gains it stands to earn on its invested capital in these entities with the fees it should receive for managing them and its funds. In the company's estimation, its four listed companies have the potential to generate a 13% total annual return over the next few years if they hit the midpoints of their growth assumptions. Meanwhile, because of its fee structure, the payments it collects for managing these entities should increase by an 18% compound annual rate over the next few years. Add to that the carried interest it stands to earn from its successful private equity funds and Brookfield Asset Management believes it can deliver a 22% total annual return for its investors over the next five years, almost double the projection of Brookfield Infrastructure.
It all adds up to a greater return potential
One of the reasons Brookfield Asset Management created Brookfield Infrastructure Partners was to cater to income-focused investors who are willing to accept a lower overall return in exchange for a higher current income stream. So, income seekers still might want to invest in that entity over its parent so they can collect its steadily growing payout. That said, investors who are seeking to compound their wealth should buy Brookfield Asset Management. That's because it should deliver a much higher total return in the coming years due to the fees it will collect from managing its affiliates and funds.
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Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Business Partners L.P. Limited Partnership Units, Brookfield Infrastructure Partners, Brookfield Property Partners, and Brookfield Renewable Energy Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.