Brookfield Asset Management predicts consolidation in the private capital industry as challenging financial markets force smaller players to find homes inside larger institutions, causing a handful of industry giants to emerge.
“Every industry eventually goes through consolidation . . . [The] alternatives industry is in the midst of this today,” said Bruce Flatt, chief executive of the Toronto-based company, which manages $834bn in assets and is the world’s second-largest alternative asset manager after Blackstone.
“In virtually all sectors, from banking and insurance to consumer products and technology, there are up to 10 industry leading players,” Flatt said in a letter cosigned by Brookfield president Conor Teskey that was published alongside the group’s first-quarter results released on Wednesday.
Brookfield has been one of the biggest buyers in the industry after it took control of credit manager Oaktree Capital Management in 2019. This quarter it paid $174mn to boost its stake in Oaktree to 68 per cent, from 64 per cent previously.
Flatt’s comments come as a push by traditional asset managers into unlisted investments and efforts by large publicly listed groups, such as Brookfield, to diversify their operations has intensified consolidation in the industry.
Late last year, Brookfield spun off its asset management operations into a new publicly listed company, separating it from a broader corporate empire that owns more than $30bn in real estate globally as well as large equity stakes in infrastructure, renewable energy and industrial investment arms that it previously seeded. The manoeuvre boosted its valuation by luring public stock investors and created opportunities for further acquisitions.
Brookfield’s asset management arm generated $547mn in fee-related earnings during the first quarter, an 11 per cent increase from a year ago, ahead of consensus analyst forecasts. These earnings were buoyed by $19bn in new capital it raised during the quarter for funds ranging from private equity to real estate, credit-orientated investments and infrastructure.
The group highlighted heavy new investment from clients in Asia and the Middle East, which underscores a shifting power balance in private capital as gulf states invest a windfall from high oil prices at a time when US and European pension funds manage an overexposure to private assets as they contend with an economic downturn.
“We are currently seeing an increased proportion of our fundraising coming from non-US clients,” said Flatt and Teskey in their letter. They said 40 per cent of the $98bn Brookfield has raised over the past year has come from those regions, marking a new high for the company.
Silicon Valley investors have increased their focus on raising capital from investors in oil-rich states like Saudi Arabia. Gulf states are also increasingly ploughing their cash into credit-orientated investments to take advantage of rising interest rates.
Brookfield on Wednesday also said it was raising a second “transition” fund focused on decarbonising energy assets such as large utilities, after raising $15bn for its first such fund. The unit, headed by former Bank of England governor Mark Carney, has already invested 85 per cent of its original fund in large deals like its $18.7bn takeover of Australian power generator Origin Energy. The fund is preparing to replace Origin’s coal energy generation with renewables over time.