By Andy Serwer
Business partnerships can try men's souls -- never mind the wallets of those who invest in them. So far, though, the tie-up between super-investors Bruce Flatt, CEO of Brookfield, and Howard Marks, co-chairman of Oaktree Capital Management, seems to be mostly friction-free and fruitful.
Seven years ago, Brookfield, the giant alternative-asset investment company, bought 62% of distressed-debt investment firm Oaktree for $4.8 billion, and Marks and Flatt have been joined at the hip ever since. Now Brookfield is buying the piece of Oaktree it doesn't own for some $3 billion.
As with many productive partnerships, Flatt and Marks (which sounds like a bluegrass band mashed up with a high-end British retailer) are complementary cats. Flatt, 61, is Manitoban raised in Winnipeg, a University of Winnipeg graduate whose parents worked at a local mutual fund company, Investors Group, that his father co-founded. Marks, 80, a legendary market commentator and Brookfield director, is a New Yorker (Forest Hills High School in Queens) with an undergraduate degree from Wharton and an M.B.A. from the University of Chicago.
Both are far from flashy and possess stellar investment bona fides. I recently wrote about identifying the next Warren Buffett and picked Flatt for his asset-allocation acumen, pointing to Brookfield's 19% annualized total return to shareholders over the past 30 years. And I tapped Marks for his market analysis and wisdom-dispensing. Here's a timely one: "'Prices are too high' is far from synonymous with 'the next move will be downward.' Things can be overpriced and stay that way for a long time...or become far more so."
I sat down with them to ask about working together and all things markets. How is the marriage going? "Extremely well," Marks says. "Brookfield is not a control freak, and in particular has not inserted itself in our investment process. They've given us additional resources that help us do a better job."
As for markets, it's fair to say Marks is sounding an alarm without trying to sound alarmist. "There's no arguing that, for the most part since October the 1st of 2022, which is when the Fed turned more dovish, optimism has been in the ascendancy," he says. "The stock market has more than doubled over that period. Optimism is what permits things like the [ SpaceX, Anthropic, and OpenAI] IPOs. You can't have that in a pessimistic environment. So you have to recognize the ascendancy of optimism. Part of that means some part of your body has to be saying, 'How do we prepare for less optimistic times?' "
"There's a bifurcated market," says Flatt. "If companies are technology related, that's one multiple, but there's a lot of low multiple, cash flowing businesses that people have forgotten about. These big IPOs are the antithesis of it."
Brookfield, which has investments in 2,000-plus companies globally that operate data centers, hydroelectric plants, transmission lines, cell towers, ports, toll roads, and more, has a complicated past and a present. Brookfield is based in Toronto (Canadian Prime Minister Mark Carney was chairman of its asset management business before assuming his current role last year) and its origin story begins in 1899 with a Canadian-owned Brazilian power company named Brascan, which in 1997 merged with a complex investment firm called Edper, set up in the 1950s by a branch of the Bronfman family. The resulting company became EdperBrascan, which a wise soul shortened to Brascan in 2000. In 2002, Flatt became CEO and even more wisely changed the name in 2005 to Brookfield.
For decades, predecessor companies of Brookfield had been buying, selling, and investing in businesses, which differentiates it from the likes of Blackstone and KKR, which began solely as investment vehicles. Flatt has expanded its capital raising as well.
Here's what Brookfield looks like today. On the top sits holding company Brookfield (ticker: BN). Its main asset is a 74% stake in Brookfield Asset Management (BAM), a $75 billion market cap, publicly traded, pure-play asset manager. BN's second bucket is a collection of listed operating companies: a 45% stake in a renewable-energy holding company ( BEP); 26% of an infrastructure company ( BIP); 69% of a private-equity company ( BBUC); and 100% of a massive real estate business (some 700 million square feet of commercial space) with trophies like Brookfield Place in New York City and Canary Wharf in London, and pieces of venerable real estate companies like General Growth Properties, Rouse, Olympia & York, and Howard Hughes.
Like Apollo Global Management and KKR, Brookfield has an insurance business, its third leg, with $200 billion in assets, that provides the parent with cash from its float. Insurance has been a listed company ( BNT), but Brookfield recently announced it will combine BNT into BN so that insurance operations will have "direct access" to Brookfield's balance sheet, allowing it to expand more readily. Fee income from all three units ($5.4 billion last year) provides steady cash flow to Brookfield.
Complexity has its privileges. Brookfield is now Bill Ackman's biggest holding of his Pershing Square hedge fund, owning almost 59.7 million shares at the end of March worth $2.7 billion. In his 2024 annual report, Ackman wrote: We believed BN's stock was extremely undervalued. Our acquisition at this valuation was made possible, in part, due to the complexity of BN's holding company structure."
Morgan Stanley analyst Michael Cyprys, who has a $60 price target on the stock, writes: "BN remains focused on capital compounding, disciplined underwriting, and value realization rather than macro forecasting or asset gathering for its own sake."
Oaktree was founded in 1995 when Marks and his partners left the Trust Company of the West to set up their own firm to invest in distressed debt. Oaktree was publicly traded from 2012 to 2019, but its stock performance was so-so, generating a total return of 93.7% versus 149.4% for the S&P 500, reflecting perhaps the countercyclicality of its business during a stock run-up. "With public ownership, if you can't produce a steady stream of assets and growth, it's not an interesting story," Marks told The Wall Street Journal. "Given truth serum," says a person familiar with the company, "we would have said, 'On our own, we're not keen to be a public company.' "
Now Oaktree is immersed in Brookfield's ecosystem, which includes massive bets on electrification and power generation. Is there a bubble there? "The expectation in what people need is here," Flatt says, gesturing high with one hand, "and what the world is building is here," gesturing low with the other hand. "It is dramatically different because this is hard to do. You have to have the site, the power, and connect the plant or the grid. You need to build the facility, you need to put chips inside of it. You have to have between $20 billion and $250 billion."
What about credit, lifeblood of the alts business? "The credit markets have been on a tear for most of the last 17 years," says Marks. "Fear recedes, skepticism and due diligence decline, and willingness, eagerness takes over, along with FOMO: 'If I don't cut the price of this loan, my competitor will make the loan.' "
What should Fed Chairman Kevin Warsh do? "I would never tell Kevin or any Fed chair what to do," Marks says. "But I would start by taking the negative. I don't see any reason to cut rates. I don't think this economy needs stimulus. We certainly don't want to make it easy for inflation to rekindle. So I guess there are reasons to raise and not to cut."
Brookfield, with an $100 billion market cap, is now the second-largest alt-asset manager after Blackstone, but its stock performance is better over the past three years. "During periods when people are worried about markets or alternative managers, our businesses, because of the durability of our cash flow streams, are seen as a much safer investment, " says Flatt. Brookfield has relatively limited exposure to private-credit software lending -- less than $10 billion out of some $1 trillion in total AUM, a spokesperson says -- some of which is in a publicly traded, $1 billion in AUM, business development company, Oaktree Specialty Lending, which has fallen from $23.43 in early in 2022 to $12 today.
How do Flatt and Marks work together? "With $1.2 trillion of total assets around the world, neither he nor I make any real decisions," says Flatt. "We care about the culture of the organization, how we're investing, the ethos of how we invest. Howard and I spend a lot of time talking about those things, which are extremely important from an overall perspective of an organization. Investments aren't about getting rich overnight, they're about compounding wealth over very long periods."
Does Marks spring his aphorisms on Flatt during their meetings? "Daily," deadpans Flatt.
A quick note about companies named 'Oak' in the investing business: There are a number of them, some related, some not. Given the physical properties of the genus Quercus, to which oak trees, "the king of the forest," belong -- density of wood, longevity, a prodigious supporter of other species -- it's not surprising so many firms choose 'oak.'
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