Brookfield Asset Management Inc. Investor Meeting Transcript/media/Files/B/...Brookfield Asset...

Brookfield Asset Management Inc.

Investor Meeting Transcript

Date: Wednesday, September 28, 2016

Time: 3:15 PM ET / 12:15 PM PT

Speakers: Bruce Flatt Senior Managing Partner and Chief Executive Officer

Brian Lawson Senior Managing Partner and Chief Financial Officer

Suzanne Fleming Senior Vice President, Branding and Communications

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© 2016 BROOKFIELD ASSET MANAGEMENT

BRUCE FLATT:

Firstly, I’d just say we really appreciate the support of everyone here, both that are online and in the

audience. We hope the information that we give you today is useful and helpful to you in analyzing the

company, and not only this presentation but there are four others over the days and for those that are

attending, we thank you for doing that.

I guess the second comment I’d make is we do this to try to make it helpful. If you have comments of

things that could be more helpful or that should be done better or different, we would love your opinions

because it’s really done for you and we want to make sure that we make it as useful as possible and

each year we try to incorporate some of the comments we get from people, but please email into any of

us if you have them.

Before I get into some slides, the overall theme of this presentation - and I put it in my words - is really

just an accelerated version of the same old plan. There’s really nothing different that we’re doing or

we’re proposing to do with this company, and essentially nothing has changed, although what I would

say is that from prior years - and Brian will show you this when he goes through the financial numbers -

the numbers are bigger, money has been raised faster and therefore the returns should be higher and

come quicker, if I put it in some short sentences. Brian will show you that as he goes through the

numbers.

All of that is really dependent on three things which I think we’d leave you with which are critical to our

organization. Number one is investment performance. If we don’t perform for our institutional clients

and for our public market clients in our listed funds, nothing matters. Nothing else will be relevant to

this company. We have to perform and every day we try to make sure that we have performance in the

business.

Number two, we continue to try to evolve the products that we offer to our clients and make them

innovative and match the needs that they have, and with interest rates coming down and other things,

we continuously have to look at the things that we’re doing for them.

Number three - and I think we’re doing well on this - it’s taken us 15 years to build it but we have to

serve our clients extremely well and if we don’t do that, even if you have good investment performance,

they’re not going to come back. You all know that from your businesses, but that’s an extremely

important third point.

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With all that, I’ll get into some of the slides that are in your deck. First off, just so you test the iPad

technology, if you weren’t here before, how many investor meetings of Brookfield have you attended?

This is a really tough question. We need your opinion. A) This is my first one; B) more than one other;

C) more than five; D) almost all of them, and E) all of them. We’ve had 12 before for those who don’t

know. Actually, we had 4% of the people that had been every single one. That’s pretty good. Okay,

39% says B) more than one other, so that wins it and I think that’s probably good. The crowd continues

to grow but we have some long-term people with the organization, so thank you.

The agenda is five things that I’m going to cover. Number one, just a review of the past 12 months.

Number two, fundraising. Number three, what we think of our competitive advantages. Number four,

the growth of the funds and what we’ve been doing, and number five, where do we go from here. Then

Brian is going to cover most of those things but put numbers to them.

In the past 12 months I’d generally say we’ve made good progress in building the business into what

we describe as the leading global manager of real assets. Probably most importantly, and someone

asked me earlier, what was the biggest thing that changed since 12 months ago? We raised $27 billion

for our latest round of flagship funds. That’s in addition to all the other money that we raise. These are

large funds which ended up being $14 billion for infrastructure, $9 billion for real estate and $4 billion for

the private equity fund.

As important, we continue to introduce new investors into the franchise. We introduced 150 new

institutions. I can tell you that it takes a lot of work to onboard them into our funds, with these large

sovereign institutional funds. The number is 425 today and our goal is to have that at 1,000 in the next

number of years or next round of funds. We continue to diversify the investor base and the numbers,

both the base is broadening out, and so are the institutions in North America that we’ve dealt with

before, and we’re getting the smaller institutions now dealing with us. And in Asia significant numbers of

institutions are coming from China, Korea and Japan.

That’s allowed us to continue to fund the investment plans that we have. We put $16 billion at work in

the last 12 months and it’s broadly focused, and I’ll tell why that’s tremendously important for us. That’s

continued to let us grow total assets under management, which have compounded on a total basis at

about 11% over the past five years and ends up just under $250 billion of total AUM. In addition to that,

we completed the spin-off of Brookfield Business Partners which, as many of you were here earlier and

heard the team, we think of three things it’s going to do. Number one, it lets investors invest directly in

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that business with us. Two, it creates a permanent base for the business; as such that for businesses

that we want to sell we will still sell, but for businesses that we want to keep we can keep them forever

on that balance sheet. Third, it gives us a currency to use that if we need to use paper to do a

transaction we can do it without ever having to dilute the shareholders of Brookfield Asset

Management.

And we’ve achieved favourable results in the listed partnerships, and we look at three things. One, the

distribution growth most importantly. Our goal is to continue to build value in the business and turn that

into increased cash flows for the business which allows us to pay out further cash flows out of the

company, and we’ve done that in all the vehicles. Two, we’ve continued to have price appreciation,

and three, our goal is to continue to grow those entities prudently, which for us led to significant and

meaningful growth in our operating results, which as Brian will describe in more detail. Fee-bearing

capital is up 15%. Our fee related earnings are up 50% and our annualized fees and carries are up

41%, so all when compared to investment managers of traditional or fixed income managers, these are

all very significant growth rates just given the sector that we’re in, which we’ll talk about in a minute.

We often have this slide and with this simple and repeatable model we try to apply in all of the

businesses that we have, and it’s pretty simple. One, we find equity. Two, we try to use the large scale

that we have to advantage us in some way with our investments. Number three, we often are investing

around the world given our breadth of operations so we can find value investments from place to place.

Number four, we try to always finance things on a low-risk basis so we never get in trouble at the

bottom of the markets. And lastly, we try to use all the people that we have to enhance the cash flows

and leverage all the operating businesses we have, and that runs across really every business that we

have within the company.

As important to the business, because we can do all those things but if we don’t have capital to invest

it’s difficult to access opportunities. And institutions, I can tell you continue to allocate increasing

amounts of capital to real asset strategies and the things that we do. I would say part of that is

because of interest rates - and I’m going to come to that in a second - and part of that is because of

stock markets and stock market returns. Since you’re all experts in the stock markets, we thought it

would help us by getting your advice, so maybe we just go to this question on the S&P 500.

By the next Investor Day, when we do it next year, will the S&P 500 be higher by, A) a lot. I’ll say that’s

10%. B) Higher by a little? C) Unchanged or D) lower by a little?

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Very interesting. So higher by a little. We’ve got a bunch of conservative people. You’re around the

lower by a little or higher by a little, within the room, so you’re here for Infrastructure and Real Estate.

It’s probably appropriate why you’re here.

Let’s go back to the slides, thank you. When I think of that and you think of the S&P 500, and you think

of equity and fixed income investments, and we talk to our clients, what are probably the two things that

we take away from them when we’re thinking about investments is, number one, is that negative

interest rates in Japan and Europe continue to put downward pressure on U.S. rates and because of

that, that is pushing people to real assets. Secondly, global growth is slow and therefore it looks like

we’re going to continue in a low interest rate, relatively low interest rate environment for a long time. As

a result of that, our belief is—and I think five years ago people would have said, “Will people continue to

invest in alternatives?” and I’d say today given the time and the duration that they’ve been in

alternatives and given the situation that’s on this slide, institutional investors are continuing to search

for more alternatives. If you look at slide 19, we continue to anticipate real assets will grow

substantially in the portfolios of investors. Reflecting back—and these numbers aren’t scientific

because they’re hard to get—but it was probably 10% in 2000 or around that. It’s maybe 15% today if

you took an average of funds and we think they’ll continue to go to 40%. You don’t need a lower

interest rate environment. We expect a higher interest rate environment by modest amounts and I think

you’ll continue to see this.

That’s being driven really by three factors which we observe when we talk to clients. Number one is

that this macro economic environment of slow growth and low interest rates as I just described.

Second, there’s a continued acceptance within institutions, and the large funds got there years ago but

now the smaller funds are finding people to deploy money for them, where real estate and infrastructure

are becoming a component within their portfolios and that’s continually getting accepted in institutional

clients and that’s a really important fact. If you would have had a quick blip of two years of low interest

rates and then everyone went back to something else, I don’t think it would have ever taken hold, but

what’s happened is it’s now taken hold in these institutions. They’ve done well and therefore they’re

building teams and they’re building groups to be able to facilitate giving people like us money.

Third, just changes in regulation and I’ll just make one observation. Alternatives and foreign

investments by Asian institutional investors continues to increase and some of those are just regulatory

changes. China used to have a 5% cap, originally 3, then 5, now it’s 15% on foreign investments in

insurance companies, and a lot of the amounts of money being driven out of Asia and out of China is

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really driven by these regulation changes that are happening in the funds and all of those things are

shifting people towards more real assets and alternatives.

We think the trends will continue despite, irrespective of interest rates increasing and whether they put

another 25 or 50 or 75 basis points on the short end. Firstly—I guess we think two things. One, that

will push long rates up but it will be the long rates will be lower due to negative interest rates in the rest

of the world than they would have otherwise been in that situation, and secondly, even at those

amounts we do very well in real assets. Interest rates should slowly move up. Our business works

very well at that and these type of assets hold their value across the cycle, we’ve always found.

Next polling question. One of the reasons that real assets is like this and I guess we would truly like

your opinion on this because, A, many of you or most of you have a vested interest in us, and if you

actually have an opinion that is different than ours and what I just told you about interest rates, then

we’d like to hear it. We think either negative interest rates are coming; a prolonged interest rate

environment; slow increase in rates over time; or significant inflation.

Okay, so Brian Lawson put in the significant rise in interest rates to combat sudden inflation. I told him

he was going to get zero. I think the interesting thing is two years ago if you asked this question, I think

it’s possible this would have been different. It’s possible people would have said rates are going up a

lot, and what you really see is a sophisticated group basically agreeing with what we think is that

interest rates are going to be low for a long time but they’re going up slowly, but they are going up over

time. Back to the slides, please.

Our view is sovereign investors have the same observation as what we just saw in that slide but they’re

leading the way into real assets, largely because they can commit large amounts of capital. Many of

them have long term and very global mandates. Most of them are quite sophisticated and diverse, and

for us what’s important is they’re looking for partners to deploy their money. Even the really large

institutions, we can generally get capital from because we can offer them co-investment opportunities in

other things which they can’t get in other places. That’s establishing real assets in their portfolios.

We think we’re positioned as a partner of choice for these type of real asset strategies, largely because

of our competitive strengths, which essentially comes down to we have 55,000 people. We can offer

them multiple funds so when we go and visit them they’re talking to, in one meeting, a very large

amount of capital that they’ve given us and it’s across a broad sector of things that they want to put

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money in, and that’s important.

Number three, we’ve established the governance and the client servicing capabilities to take care of

them.

Number four, we can put large amounts of money to work for them. We can put that to work in over

30 countries which not many other people can do for them.

Lastly, and probably more importantly, our track record is strong so that they feel comfortable when

they give us that money.

One of the big advantages we have in real asset investing, and I said it this way on the slide, is that

when we’re investing, developing a piece of real estate, building a toll road, running a power plant or

running any one of our real asset type businesses, it’s hard work. It takes operating skills. It takes

people. There are a tremendous amount of issues every day and that gives us a huge competitive

advantage over a financial player or someone else that’s just going to do it on their own or someone

that just starts up tomorrow morning. It gives us a big competitive advantage over them.

We provide three distinct offerings to investors: our limited partnerships, as you know; our private funds

and our public securities business and that today totals about $108 billion, but in addition to that we

source money from many different ways and Sam, tomorrow, in Brookfield Infrastructure will talk about

the pipeline we just committed to buy in Brazil, and we used all five sources of capital displayed on this

slide to complete that transaction. We put part of it in a private fund, part of it went in the listed

partnership, part of it went to co-investors who invested with us, part of it we bought as a commitment

on Brookfield Asset Management’s balance sheet and we intend to syndicate to other clients that didn’t

have time to underwrite it prior to us closing the commitment. Lastly, we have joint venture partners,

and all that is a unique thing that we can do that not many other people can bring to the table in large

transactions to be able to go ahead.

We think that industry that we’re marketing towards will continue to head towards around $70 trillion

into the 2020s, and that we’ve put together the backbone to manage the growth and there’s really two

things they want. They want investment performance but they want to be taken care of and we’ve

invested the money to have the compliance, the governance and the servicing capabilities. This large

scale capital is a very distinct advantage for us because real asset transactions can usually take large

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amounts of capital commitments. Today we have about $18 billion of dry powder in our private funds

plus we have the liquidity of our listed partnerships and the perpetual equity that they possess, plus we

have our balance sheet on top of it that can support them. We have significant relationships that we’ve

built with institutions to co-invest beside us and that allows us to do things which other people can’t and

really it comes down to in an environment that we’ve been in. We’ve been able to generate the returns

that are on this slide, which on the opportunistic side are in the 20s and in the core and value-add side

are in the mid-teens, which are very good returns. These include the financial crisis vintages.

Our investment approach really focuses on two things: one, purchasing for value, and two, making

repeatable investments, and I’d say if you think of how we do what we do, continuously think about

those two things when we add to the company. Is it for value, and two, or is it a repeatable investment?

Often it’s both and a couple of examples: in the renewable company we bought a Colombian hydro

portfolio. We think we bought at value and we’ve done it 130 times before so it’s an easy underwriting

for us to do it.

We recently went into the self-storage business in the United States and we continue to acquire self-

storage facilities in a very repeatable way to build out the business. In district energy, in our

infrastructure company, we started with one large business in Toronto and we’ve continued to add

other cities across the United States using the platform and the people that we acquired with that

acquisition.

The three things that it really comes down to for us to give us an advantage to earn the returns as I

described are our large-scale capital, our global reach and the operating capabilities we possess. To

use just three short examples—but before I do that, I’m going to ask for your advice. On the iPads, if

you were going to give us advice on where we should invest and by virtue of that I’ll take where you

don’t want us to invest, for the next five years, would you have us focus on Australia, Brazil, China,

India or the UK?

I think the jury is in. I would say we must have Brookfield supporters here because there may be no

other Client Day in history that has said we should invest in Brazil and India. Australia is a low-growth

market where we’ll find add-ons but there isn’t great value there today. China is always difficult to

invest so I’d agree with that. The UK is more uncertain, and we may find some opportunities but I don’t

think they’re going to be in large scale, and Brazil and India have some incredible opportunities which

you will hear about over the next few days, so thank you for that.

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To the slides, please.

If you think of those competitive advantages that we have, and you think of large-scale capital, global

reach and operating capabilities, we picked three examples so you understand what we’re talking about

because sometimes examples mean more than words. If you think of the pipeline we just bought, it’s

$5 billion; it’s in Brazil and it takes operating capabilities to underwrite and operate, and not many

people could compete with that.

We bought a $1.3 billion office complex in Germany that is office, retail and hotels. In fact, it looks

similar to this complex, just a little bit smaller. It’s 21 buildings of residential, retail and office, but

there’s not too many people that can compete with that.

In the hydroelectric business we’ve put $1.5 billion of capital into the U.S. with our renewables platform

in the last little while, and again, there’s not that many renewable players that can put that type of

money to work.

All of that enables us to continuously invest our funds in a prudent fashion and just to give you the

‘where we are’ is that our three funds we just closed earlier this year, BSREP II, the real estate fund, is

65% invested because we had a long fundraising period; BIF III is 30% and BCP IV is about just over

30%, which should position us to start fundraising for the next series of funds starting early in 2017.

What does that all mean for the overall company? I’ll leave you with a few things. We think we’ve

achieved global scale in the businesses we’re in. It’s often hard work but we think the business which

we have, which is very broad in 30 countries with 700 investment people and 55,000 operating people

gives us a great advantage. It gives us the capacity to continue to grow at an enhanced rate in the

business.

Our pipeline for real asset investment opportunities is very strong and often I get asked why that is in

an environment where interest rates are low and it seems that money is chasing everything. The fact is

we just try to find spots where other people are not, and your Brazil and India comments on this slide

are part of that.

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Interest rates look like they’re going to be low but commodities and emerging markets are definitely

recovering and we think that Brazil has bottomed and I’d say we saw that based on the fundamentals of

the businesses we have there in February or March of 2016, this year, and it’s going to be a slow way

back but we think it’s slowly coming back.

On top of the business that we have today we continue to launch new products in the company. We’re

expanding our real estate and our infrastructure finance funds and with the banking sector not wanting

to lend to some parts of the capital structure that’s an advantage for us. We’re creating core-plus

private property funds for our institutional clients and we’re continuing to look at geographic sleeves for

funds. On the public side, we added a distress hedge fund in ’15. We’re adding additional long-short

and long-only infrastructure funds and we’ve created a real asset fund for public markets.

Looking ahead, we’re really focused on five things. Number one, enhancing the returns and the asset

values that we have in the business, trying to drive extra return out of the things we have. Number two,

making sure that we serve the clients that we have. Number three, putting the money to work that we

have from clients to invest these funds prudently. Number four, preparing for the next series of funds

which we’ll start in ’17. Lastly, optimizing the value of the listed issuers we have because those are

extremely important to us, both for the success of our asset management business but also we have an

enormous investment in them.

Bringing it all together, I would say just the following three things. We think the environment is

favourable. There’s a strong demand for real asset strategies, attractive investment opportunities and

financing conditions are almost too good to be true because spreads are coming in, rates are low and

you can finance assets at incredible numbers today and we’re fixing for as long as we possibly can in

as many places as we can.

We’re positioned with large scale capital and a strong client base to grow. The execution of our

strategy will continue to generate value over the next 10 years and Brian is going to go through and

detail the numbers at a very high level where we head towards is $4 billion of asset management cash

flow. I noticed this morning that Elon Musk had a press release and he said by 10 years, 2026, he was

going to have people on Mars. We actually don’t plan on going to Mars with this company but what

Brian thinks of our mathematical exercise, if you look at the compound returns of what we do in the

business, each of the businesses and the asset management franchise on top of that, the intrinsic

value of the business—where it trades, who knows—but the intrinsic value is about $160 in 2026, so

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that’s 10 years from now.

With that, I’m going to turn it over to Brian and he’ll try to describe the financial results for you.

BRIAN LAWSON:

Thanks Bruce. Good afternoon. So I’m going to cover three themes in my remarks this afternoon.

First of all, some of the progress since last year. I want to spend a bit of time talking about the balance

sheet and our liquidity profile, and also the growth potential that we see within the business.

As Bruce mentioned, we did achieve a lot of growth and progress last year and so to put some

numbers around that, that $16 billion increase in private fund capital leads to about $160 million of

additional annualized base fees, and importantly, another $355 million of target carry, so good

contribution there. Also, on the same side with the listed partnership capitalization, that price

appreciation, capital generation and the launch of BBU added about $90 million to our annualized fee

revenues as well. So, you pull that together, that’s how you get to the 50% increase in fee-related

earnings on an LTM basis that Bruce referenced earlier, and you’ll see most of it comes from that step

up in the base fees and the IDRs from the new capital coming in.

What that meant is, we showed you a growth trajectory last year and that’s the blue bar, and then if you

look at the orange-ish bar, that’s where we are today. The comment I make—and Bruce referenced

this in his lead-in comments—is that by having that significant progress last year, what that allows us to

do, and this is common to the industry, is you get to bring a lot of future growth forward because—and

I’ll talk a little bit more about just the whole fundraising cycle—is it just accelerates a lot of those out

years and brings them closer and that’s what enables you to have this parallel shift up in the growth

potential for the company.

At the same time as we increased the fee-related earnings, that’s new private fund capital coming in, it

increased the amount of capital that we have that’s eligible to earn carry, and so that target carry

number that we talk about—will come back to that one as well—increased significantly as well over the

past year.

If you take those two things together and you apply the same kind of multiples that we did at this time

last year, what you’ll see is there’s a very significant increase in the intrinsic value of the company, of

the asset management franchise within the company, and again, well above past that growth trajectory

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that we outlined last year, and again that’s 20 times fee-related earnings and 10 times that target carry

net of the associated direct costs.

In addition, there are a number of things. Bruce mentioned the first two. The third one, we did achieve

11% total return on our IFRS portfolio values and what that refers to is it’s the FFO and to the extent

that we record any valuation adjustments on our IFRS book values, no currency impact, and generated

an 11% return which is okay. We’d like to do better than that but it was okay under the circumstances.

Then we did have 8% dividend growth on the BAM share dividend, and I’ll talk a bit about our

capitalization and liquidity profile, but through an ongoing debt and preferred share issuance, continue

to strengthen that. The liquidity profile is quite an interesting one in how the free cash flow is building

up in the business. So we’ll come to that right now, which is the balance sheet.

There’s really a few key strategic advantages that it gives us, both on the strengths and liquidity side.

Bruce has talked about how it facilitates our execution and complements the asset management

business and also gives us the opportunity to create value throughout the organization, but in particular,

to receive some of that value creation on our balance sheet and do a couple of other things as well.

As we stated in prior years—and this is an important feature we think for the company—is roughly 85%

of that invested capital, so that $30 billion on our balance sheet, is in the form of listed securities which

gives us a lot of flexibility, liquidity and I think really provides increased transparency in what Brookfield

really looks like. It makes it I think simple in that regard.

We continue to finance everything on a very conservative basis. This is one of the mantras throughout

the organization is heavily dominated by investment grade financing, and so at the Brookfield corporate

level we have roughly $8 billion of leverage, $4 billion of it is in the form of long-term corporate bonds,

fixed rate, 8-year average maturities. Then an equal amount of perpetual preferred shares, so that

gives us a very long and stable form of leverage that we think is quite helpful to enhancing the returns

to the common shareholders and that’s basically our market cap in there, the billion shares at around

$35 a share.

Then from a liquidity perspective, having that balance sheet and having that largely replicated

throughout the listed issuers as well gives us what we call core liquidity of $6 billion across the group

and also $18 billion of the uncalled fund commitments, that so-called dry powder that Bruce referenced

earlier, so a total of $24 billion of fire power that we have coming off of our balance sheet and as

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commitments into our funds.

In terms of some of the benefits of that—so Bruce talked earlier about the co-invest and Sam is going

to talk more about it and you’ll hear it come up throughout the presentations—having the access to that

capital is a tremendous competitive advantage when we are pursuing these large transactions. But in

addition to that what it also means is some of the innovation that we talk about—that’s an important

thing for us throughout the business. It gives us the capital and the liquidity to develop some of these

products on our own balance sheet, establish the track records, build the resources and the execution

before we roll that out and open it up to investors.

As for value creation, there’s a number of ways that we can get at that. Obviously we participate in the

intrinsic value that gets created. There areas that we can narrow discounts as well, BPY in particular

and—you’ll hear more about that tomorrow. The liquidity of that balance sheet and the fact that it’s held

through listed issuers, even if down below we’ve got a number of private assets that aren’t necessarily

that liquid in and of themselves at that asset level, does give us the ability to re-deploy and reallocate

capital within the Brookfield balance sheet. We’ve talked about that in the past, and then also we have

the opportunity to conduct share buybacks for value when it makes sense and we do that from time to

time.

I did want to talk a bit about how we see just the returns coming within the balance sheet, and if you

think about in particular one of the listed issuers, if you’ve got a distribution yield of X and you add a

distribution growth rate of Y, it gives you a pretty simple estimate of a total return. That’s really what

this slide lays out, is we’ve got the cash flow that we get from our invested capital, and so that would be

the distributions—we get about $1.2 billion of distributions from the listed issuers of the public holdings

on our balance sheet, and when you average that out with some of the businesses that we largely

redeploy the capital in, you end up with just shy of a 4% cash yield. Then if you look at the targeted

distribution increases and you take the midpoint of what we’ve projected for the listed issuers and some

of the other companies, you end up with another 7%. So basically you’re at about 10 or 11%,

assuming the yields stay about the same and you hit your distribution growth rates. So that’s a big

chunk of how we contribute to the balance sheet growth.

Then we’ve highlighted in particular one obvious one which is that BPY discount. The way this table

here works is you’ve got at the top, that’s that $30 billion and that’s simply the quoted market value on

our balance sheet. That doesn’t take into consideration intrinsic value or anything like that. Then you

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add those factors in, in terms of the capital appreciation and then some cash that comes in and out,

pays out our dividends, you end up with $55 billion. At the end of five years, in 2021, that’s about a

13.5% compound increase in the balance sheet, in the invested capital.

That’s just the quick math on the BPY discount from a BAM perspective. It’s 500 units. $8 a unit is

close to $4 billion and that compounds up over a five-year period to about $5 billion, so a pretty simple

concept. Obviously there’s lots to do in that regard to make it happen.

This is one of the things that we’ve not talked a whole lot about in the past, is the amount of free cash

flow that we are now generating within Brookfield itself. The fee-related earnings, those are very cash

generative. Basically they come in quarterly and you pay out your direct costs associated but that’s

now tracking at LTM was $660 million, so we’re through that now. Then as I mentioned there was

about $1.2 billion of cash distributions that come in again quarterly from our holdings on our balance

sheet. So then we do pay out interest on our debt, we pay out some corporate costs and then we pay

out preferred share dividends. Just if you’re wondering about why the difference is between the $356

million and the $489 million, that’s because the preferred dividends don’t show up in your FFO. That

gets deducted when you do your FFO per share. So that’s the increase to that $489 million. But the

upshot of it all is we have $1.4 billion of very consistent cash flow coming in and that’s what we pay our

dividends out, so last year it was about $500 million in dividends. So there’s a lot of cash flow building

up and accumulating within the business to fund these sorts of initiatives and that does not include

anything for carried interest, nor does it include any disposition gains in terms of rotating capital on our

balance sheet. If you track through some of the growth profile in the business, that number should

continue to grow significantly over the past five years.

So all in all, what we see ourselves is having a lot of cash flow growth within the business. Just talking

about the dividend quickly—it was 8% last year—it’s generally been around 7% over the past five

years. It’s obviously well covered and we don’t really expect any significant policy change in the near

term. Obviously we reassess it on an ongoing basis with the Board of Directors. But then the other

point we’d make in addition to that cash dividend we pay you every once in a while, we pay you a

special distribution, whether it’s this year’s BBU, or in the past, BPY and BIP as well.

Looking ahead, we made the comment about the growth rate accelerating quite quickly over the past

five years and so we’ll talk a bit about that. Before we get into that, a polling question.

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Just in terms of other asset managers, alternative asset managers such as an Apollo or Blackstone or

KKR, we’re just curious in terms of the audience here, how many of you would follow and own; follow

but don’t own; follow the traditional managers but none of the alternatives; or none of the above?

Okay. That seems to be settling in a spot where I’d say to a certain extent are almost a bit of an

anomaly for you in the sense that we’re an alternative asset manager. So I guess that falls in about the

36% of you would follow, but don’t own other asset managers. We’d be the ownership side of that. So

perhaps we could move into the slides.

So with that, we do have a couple of slides that talk a bit about our take on how the alternative asset

management model works for us, how we see it. So I think given that polling response hopefully it’s of

help and interest to you.

In essence, if you really boil it down, and you’ve heard this a few times, but there’s three key drivers to

the growth. One is raising that capital establishes the fee base for us. Two is performance. You have

to do it obviously to perform for your clients but what it also obtains for us is carried interest and that

performance allows us to compound the cash flow growth within the listed issuers which enables us to

increase distributions which increases the IDRs. If you think about it just with respect to private funds

itself, that part of our business, there are multiple points of value creation. As I mentioned, when you

raise the money you lock in that fee base and it’s there for a long period of time if you deploy that

capital. So once you deploy that capital, you lock it in for the full length of the fund and then you get

into enhancing the value of it, generating that IRR, generating the multiple of capital. That gives you

the investment performance but it also gives you those carried interests. Then when you get into

harvesting mode, then you’re monetizing and returning the capital and that’s when you lock in the carry

and that becomes, in our jargon, nomenclature realized carry, and we’ll talk a bit about that.

One of the things that’s important for us and that we think is really helpful in the quality of these cash

flow streams is we’ve raised a lot of the capital within the last five years. So if you think about these as

being 10-year, 12-year funds, that means that roughly 90% of that capital is still in place in five year’s

time and in the meantime we’re going to be raising more funds, and so that stacking effect of having

incremental fund capital really accelerates the growth. We talked a bit about that last year. But then

the other thing that we’ve seen, particularly with the last series of funds is that acceleration of pace.

We’ve shortened that cycle in terms of launching and deploying these funds, and that infrastructure

fund was basically 10 months to raise and that it’s already 30% deployed, and Bruce mentioned the

rate on BSREP to the extent that it’s deployed.

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What that means for us is the potential to raise two more series of funds over the next five years, and if

we just match the amount of fee-bearing capital out of that last $27 billion, that would be another

$20 billion in each of those raises for the next two series of vintages funds. Plus, we’re planning to do

some core funds and some niche funds and some public securities and that would add about

$600 million of base fees.

The other side of it, on the listed partnerships, we talked about shrinking valuation gaps but also just

hitting the midpoint of the distribution growth and issuing some non-dilutive capital—so I’m talking about

preferred shares and corporate debt—gives us another $32 billion and another $400 million of fee

revenues between now and 2021. Also, with the increase in the distributions, that steps up our IDR so

that we would add about $250 million of IDRs from the current levels of around $100 million to

$340 million is the midpoint base case. That gives strong growth in the fee-related earnings and drives

a big increase in the valuation. So the top line, the base fees, that billion-dollar increase, that’s really

the $600 million from the private funds and $400 million from the listed issuers and the $250 million

increase in the IDRs, and maintaining that gross margin at 60%.

So we provide you this business model and there’s really a couple of things. One is we think hopefully

it illustrates the key drivers and relationships within the business and that it reinforces what we think is

a pretty simple business model. Hopefully what that will enable you to do as we report results in the

future and our progress, that it will allow you to take that and assess your views as to where the

intrinsic value of the shares are building over time. That’s really why we walk you through these

numbers on an annual basis.

In addition to the fee-related earnings, we do see a lot of carried interest coming in, so I thought I would

just take a moment, and we went through this last year but I think there were a few people that are here

for the first time—the value of the polling question. The target carry is what we talk about as being the

potential that if we hit our target returns in a fund, just mechanically what we stand to earn over the life

of that fund and then we simply average it out on a straight line basis. So it’s probably a little bit

forward-leading but I think the reason why we do that is just to give you an appreciation for when we

raise a fund what type of earnings potential we’re adding to the organization every year when we do

that.

Second is the unrealized carried interest and that is based on the actual investment performance to a

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period end and based on that performance if we wound the fund up on that day how much carry would

we earn, and that’s a number we put in our supplemental information that we provide you each quarter

as well as number one.

Then three is what shows up in our financial statements. I made the comment earlier that a lot of our

carry gets crystalized at the tail end and we don’t book it in our financial statements until there’s no

more potential for clawback. So that means it’s right towards the tail end of a fund. We’re one of the

few asset managers that does that, so our numbers will not be comparable to a lot of the other peers

that we posted up earlier, so we just wanted to make sure that we point that out. So when you hear us

talk about carry and you wonder where heck is it in our financial statements, that’s why; it’s building but

we don’t book it until when it’s no more carry back. It’s a pretty conservative approach.

In terms of that unrealized carry that’s accumulated to date, it’s roughly a billion dollars and you’ll see it

spread over a number of funds, some of which are going to come up sooner, but some of them which

will come up later. Then looking forward, that projected growth in our private fund capital leads to a

17% increase in the amount of carry eligible capital in the commensurate increase in the amount of

target carry, and we would see if the funds go out on that, I’ll say mechanical basis—they come

towards the end and we wind them up and we hit our target returns, we stand to realize roughly

$8 billion of carry over that period of time, mostly from funds that are in place today but you’ll see also

largely in the out-years.

Pulling it all together, there are a number of different opportunities that I think you’ve seen so far that

we can increase share value, but before we just roll into that, again another polling question. We’d just

love to get your views for which parts of our business you think is the toughest to value. So there’s A)

the manager fee-related earnings, B) the carried interest, C) the balance sheet, D) all of them, that you

don’t understand, or E) you get all of them and it’s easy.

Okay. So far not a big surprise, and I’m delighted to see no one selected option A. So okay, so we’ve

got some homework to do on the carried interest. Thank you.

Maybe we could move to the next slide because that’s the inverse question. So what’s the easiest?

I suspect I already know the answer from what you last did. What’s the easiest part to value? A) Fee-

related earnings; B) carried interest; C) the balance sheet; D) all of them; E) none of them?

17


There we go. Okay. Fine. I think we know what we need to do out of this one and what we need to

add into our disclosures.

Look, the carry is going to be tough because a lot of it does occur over time but hopefully we’ll just keep

telling you as much as we can about it and I think it’s a bit of an industry-wide challenge but I do have a

comment I’d like to make on that later on.

Perhaps we can just move back to the slides then? Thank you.

As we do each year, we say okay, if this happens and that happens what could it look like in five years’

time, so if we do that fundraising on the private side that we talked about and that should generate

roughly $1.5 billion of fee-related earnings, 20 times multiple, $29 billion. Same math on the carried

interest. Then on the invested capital we have that 13.5% compound increase in it leads you to the $55

billion and so that’s $92 billion. Ninety-two dollars a share, total return including, assuming that our

dividend rolls forward with 7% annual increase, is about a 22% return.

So just thinking about that, you’ve got to think one of the things that you should watch in terms of that is

the pace at which we can raise that capital. So if that two series of funds takes us a little bit longer,

then maybe we’re into 2022, but I would say even if it takes us a little bit longer, we’re still going to be

posting some pretty good returns in terms of building up intrinsic value. As much as that’s perhaps one

area that things might slip a bit, but I think based on what we’ve seen happening in the industry and our

own experience in raising funds, we feel pretty good about our prospects at doing that, but there are

other areas as is our case that we would point out to you where we could outperform.

So from that perspective, one of the things that we’ve seen in the progression of our funds and the

increase in scale of each funds, is we’ve just assumed that the next two series of vintages of flagship

funds are the same. We would hope that each one is significantly larger than the predecessor funds

and so you could add $5 billion in one and $10 billion in another and the commensurate increase in fee-

related earnings and targeted carry.

Similarly, on the listed partnerships, we posted that at the base line of the midpoint and I think you’ve

seen in the past we’ve had a good track record of exceeding those. We can hit the high point on our

distribution growth, and if we can issue some equity on an accretive basis then that also has a good

increase in the fee side of it as well which should give us another $8.3 billion from the fee-related

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earnings, another $2.1 billion from the target carry and that then would roll into an increased value for

the manager, and then on the invested capital side that increase in the intrinsic value and distribution

growth should lead us to higher values on our own balance sheet, all leading toward $113 share price

based on those mechanical assumptions.

We have one last polling question for you and that is—I guess it’s coming back to the carry so I think I

know one of the words that will be up there, but in terms of things that we can help you with by

providing you more information, throughout our annual reporting and communications, but also this time

last year, so whether it’s carry, performance, what our pipeline looks like, we’d love to get some

feedback from you.

Okay, there we go. Culture. Okay, good one. Taxes. Okay. I think we’re going to have to stop this at

some point in time because we’ve already got enough homework out of this one. Okay good. Let’s

move on, otherwise we’re going to be working a lot of overtime.

I did want to talk about, and maybe this is in part answering some of the questions that came up there.

Just before wrapping things up here is just some of the favourable characteristics and why we think this

is a really favourable business in terms of the fundamentals of the cash flows.

First of all, and I think you all get this on the fee-related earnings. Very stable, fixed rate contractual

arrangements. The capital is very sticky. The IDRs, it’s a simple mechanical calculation based on

distribution policies and we give you target distribution increases and things, and the costs are largely

controllable. We don’t have these big input costs that can vary wildly.

The carry is an interesting one and we’ll see how this plays out but our belief with respect to the type of

investment strategies that we have, that we earn carry, a lot of them, it should become a pretty good,

stable source of cash flow because in these circumstances a lot of it is driven by lower volatility asset

classes and is supported by growth and tangible asset values, and importantly, the realization of a lot of

these assets within our funds are not subject to an IPO market value or IPO market conditions. A lot of

them you transact with on a private basis or a portfolio basis; you always have the IPO as an option.

We think that’s something that increases the quality of the carry that we can look forward to earning.

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Then on the balance sheet, if you look through those listed issuers, what you see is a portfolio of assets

that are predominantly high quality core or core-plus returns. The cash flows we receive are very

visible and predictable distributions but underlying that there are a lot of contractual cash flows.

Then finally, just to pick up on Bruce’s comments at the outset—I’ve talked a lot about numbers and

things like that but there really are those three key priorities that are fundamental to us being able to

achieve the types of things that we’re hoping to achieve within the business, and again, just to reiterate

them, it’s that best-in-class investment performance. It’s designing the innovative funds for our clients

so that we can meet their ongoing investment objectives in the future. Then lastly, excellence of

service across the board, and those really are, stepping back, the key determinants of our long-term

success.

With that, I will hand the podium back over to Bruce for Q&A. Thank you.

BRUCE FLATT:

Before I take questions, the only comment I’d make, just on carry, and to be additive to the comments

that Brian made on carry. The way really to think about carry is that for the franchise that we have and

for all of the things that we possess and for all the people that we pay for around the world, our

institutional clients pay us a small fee on an annual basis and then they pay us essentially 20% of the

returns out of the funds, as long as we achieve a threshold. But because the assets that we buy are

the assets that you think about when you think about Brookfield—they are great office buildings or

malls or toll roads or pipelines—as long as we’re buying conservative, great investments, leveraging

them conservatively and holding them for long durations, we should be able to earn 12%, 15%, 16%

returns on a levered basis. If we do that, we get 20% of the returns. So the carry, to Brian’s point, this

is not—other than our private equity business—the rest of the business, which is 80% of the assets, is

very long-term duration assets which earn those returns. So the carry that we generate within our

funds is much different than private equity returns which are dependent upon IPO markets, sales and

other things. These are much, much longer in duration. I just make that comment with respect to carry

and when you’re thinking about it and analyzing the company.

With that, I’d be happy to take any questions, or Brian as well. Over in the back there.

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MALE SPEAKER:

Bruce, my recollection is a year or two ago you had talked about the possibility of spinning out the asset

management business, and I think you mentioned a time period of perhaps 10 years. Are you still

thinking about that? Can you give us some of your thoughts?

BRUCE FLATT:

I don’t know if I said that a couple of years ago or not, but it’s possible. Here’s what I’d say, and the

question is toward just will we spin out the asset manager at Brookfield. I think on occasions over the

past 10 years as we’ve built the company we’ve thought about should the manager be separate from

the capital or should the capital be tied to the manager?

Originally what we told investors was that while we were building the business we felt it was extremely

important to have the capital beside the business. I’d say the business is built today. It’s very large

and it’s possible today that we could spin the manager out and it would trade well on its own and it

would have its own life. I think it’s also possible that having the amount of capital that we have on the

balance sheet tied right beside the manager is more valuable forever because of the extra benefits that

it gives us. We think about it all the time as to how do we maximize value in the organization for the

common shareholder of the company, and it’s possible that it’s right to keep the whole thing together.

Today we think given the markets that we can use that capital prudently and not spin it off, but it’s

possible that at a point in time we think it’s the right thing to do.

So the specific answer is we’re open to it. We’re not planning on doing it at the moment but we

continuously think about it with only one thing in mind: how do we create the most value for the

shareholders over the long term with the structure?

I guess the only other thing I’d say is that we need to ensure—we’ve learned this maybe over the

years—we need to ensure that the shareholders of Brookfield can understand the company and it’s

transparent to them and it doesn’t confuse them by things that we do. So I’d say the only other added

thing that we put onto it, is one, just how do we maximize value, and number two, we need to make

sure that everyone understands exactly how everything fits together.

I hope that answers the question but it’s not a definitive one, as we sit.

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ANDREW KUSKE:

Andrew Kuske, Credit Suisse. Bruce, could you just give us some colour and commentary on your

co-investors and just the dynamics on fee structures or lack thereof, and then effectively with some of

the larger co-invests it’s good that they write very large cheques but are you getting them smarter in

asset classes where they ultimately wind up competing with you? Or against you?

BRUCE FLATT:

Hopefully everyone heard the question and that’s just that, what about co-investors coming into funds

and the fees that they pay and how that fits into the business model? Secondly, will they ultimately

compete with us? I’d say it’s something we think about a lot and we talk to everyone of those 400 to

500 clients and probably another 200 or 300 on a monthly basis, so we have a lot of feedback from

them. I’d characterize it the following way.

There are some institutions that invest with us and either they don’t have a lot of investment people in

their own organization and therefore they just allocate funds to us, and they do that because we

essentially act as an outsourced investment management department for their real asset allocations.

That’s either because they’re smaller in size or they haven’t set it up on their own balance sheet yet.

So we’re their outsourced organization. They may have two others. They may have 10 others. They

may have 20 others, but we’re one of them. So that’s group number one.

Group two is people that have either the size where they can put more size allowance of money out or

they’ve actually hired people internally to do this but they don’t have the skills to do it on their own and

what they do is they give us money into our funds but what they want from us is something else in that.

They want to come into our funds but they’re learning the business and we’re a quasi-outsourced

investment management department for them, but in addition they want to interact with us and they

want to do other things with us. That’s where we have a tremendous advantage of being able to offer

them products, not only just our funds but because—for example in the real estate business, because

we own 100 million square feet of office buildings and 60 million square feet of multi-family buildings

and 125 million square feet of retail, etc., etc., we can offer them other things than just fund investments

and we can offer them co-investments. So we offer them direct investment co-investments and we

engage with them.

So I would say that second group of institutional clients is a vast group and they range in types of

people, in types of size and each relationship is slightly nuanced and different and what we try to do is

22


tailor our relationship for them which will work for them but can also work within the systems that we

have, and the advantage we have is given the scale, size and multi-product business that we have,

there’s not too many people that can offer that to them. So we have a tremendous advantage in there.

To your second part of the question about competition, group number three is there are some

organizations in the world that have built full-scale investment management organizations that rarely

needs somebody to outsource investments to. There are maybe 10 in the world, if you stretched, that

really have that. Maybe it’s 20; some are smaller but it’s not that many. And I’d identify the reason why

there aren’t that many really large funds, and the things that we do often take really large amounts of

capital.

Number two, many don’t have the governance set-ups to be able to hire the people. They’re

government organizations which have pay structures and other things that don’t allow them to hire the

people that we do.

Number three, just size.

So, I guess I’d just say that third group, there’s no doubt, there are a few organizations in this group

that don’t give us money that are very active and in fact many of our investors are Canadians. There

are many Canadians that have done that and they’re as advanced in their investment management

capabilities of anyone in the world, and therefore some of the big ones don’t invest with us any more

because they’ve built their own organizations, but what that’s led to is many of the smaller

organizations and mid-size organizations in Canada, looking at their allocations to real assets.

I’d just say that even group number three that may or may not invest with us—and some do even

though they have big organizations—what that’s done is it continues to broaden the base of investors

that will invest into real assets and that’s really good for the business, for us and for others within the

business.

Hopefully that answers the question. We have a question down here.

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MALE SPEAKER:

I guess I’m curious on your thoughts around your dividend policy within the context of the world that you

see and the value of current income and the cash flows you’ve demonstrated.

BRUCE FLATT:

The question is just on dividends. We’ve had a view over time that we didn’t really want to have a high

dividend policy, largely because we wanted to ensure that at the bottom of the market we could make

unbelievable investments that allowed us to do things that others could never do. We may be getting to

the point where we have very large amounts of free cash flow within the business and therefore we can

crank up the dividend if that’s what we should do.

I’d just say that even though we have enormous amounts of capital and even though we have very

large amounts looking forward of free cash flow, I can tell you that Brian in particular but me and others

always are worrying about how much money we have to deal with the opportunities that come forward,

and part of it is this business continues to grow at very large pace, and the funds get bigger. That’s all

good for the franchise, don’t get me wrong, this is all good. But it means that you’re always concerned

about how much money you have in the machine to ensure that you never, A) get yourself in a situation

where you aren’t liquid, and B), you have available capital to do the things like we’ve done in past. We

bought these buildings in 1993. We bought Babcock & Brown out of bankruptcy. We’ve got General

Growth out of bankruptcy. We could buy a pipeline in Brazil and I could give you 20 more examples.

It’s amazing what availability of capital does in the business. So you never want to have to go back and

retrace your dividend with your investors because they really get mad at you. But I think what Brian

basically said, we’ve grown at 7 or 8% in the past number of years; we’re going to continue to grow at

that pace over time and I think that’s easily within the means of the company.

I’d say if you all wrote us and said, “You know what you should do? We need to have a higher dividend

because it would be great and that’s what we want,” we’d consider it. Bottom line, we’re here to

manage the money for the shareholders of the company and if the shareholders of the company want a

high dividend, within the confines of everything we can do, we could have a higher dividend. I guess I’d

say we think we can deploy the capital within the business, A) more tax effectively, and B) at higher

rates of growth than what you’d get. I’d guess you could argue we’re coming into a world where

income is much, much, more attractive and maybe the security in the short-term trades higher if you

had a higher dividend then that’s certainly possible. It all depends on what you want. So if you,

Charles, think that we should have a higher dividend, you send me an email on Monday.

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ANN DAI:

Thanks. Ann Dai from KBW. Bruce, earlier you spoke about banks stepping back from certain types of

lending and funds that you’re raising around that. I’m wondering if we can step back a little bit and look

at the entire opportunity set for BAM within the credit space, across the credit spectrum, whether it’s in

your private funds business or in public markets. If we just look out five to ten years, is credit a much

bigger piece of the BAM story?

BRUCE FLATT:

The question is just—I’ll paraphrase and make sure I get it right. Where does credit fit into Brookfield’s

life for the next 10 years and is it a big opportunity? I’d maybe make three comments.

Number one, the credit area is a dangerous area and many banks over the past 25 years—you’ll all

know them—got themselves in trouble because credit is a risky business and if you don’t do it right, you

don’t have the right form of capital, eventually loans go bad and you have credit issues. So number

one, we come to this space with a very hard asset view and we want to make sure that anything we do

in credit is based in the same fundamentals that we’ve run on our businesses. And why we really think

it’s important to come from that direction is that any one fund we have or any investment we have or

anything we do reflects across everything, and therefore if you have one fund that has a bunch of

investors in it that has a problem, it can—for somebody that’s a large manager like us, it can ripple

across all your funds. So the first comment is we come to it with that in mind.

Number two, there’s no doubt the financial system has with the regulations that have been put in place

in the United States and Europe in particular, have been offloading the riskier parts of the capital

structure onto non-bank financial institutions. So we’ve focused on three things and are going to

continue to grow those businesses. And I think to directly answer your question, over the next 10 years

each one of them will be quite significant and could contribute a lot, although they don’t pay 2 and 20.

Our private equity funds are private funds so what we have are very high margin funds. They don’t

earn as much and therefore they don’t pay as much, so when someone grows their business by a lot of

credit, you can say you have a lot of assets under management. What gets to the bottom line is a lot

but it’s not so much compared to a private equity business.

But we’re growing our mezzanine real estate business which is buying mortgages and second

mortgages on real estate. We’re in our fifth fund now and that business continues to grow. We started

25


a similar business, infrastructure, and we’re doing the same thing with corporate credit. So I think all

three of those will grow and they could become very big but they’ll be very targeted to make sure that

we don’t make any mistakes.

ANN DAI:

Thank you.

MALE SPEAKER:

Bruce, with all these specialized funds now, do you worry at all about a silo effect? People not

necessarily being on the same team the way that they might have been in the old days? People feeling

more or less an allegiance to their particular fund or their particular asset class? I’m just curious too, I

don’t begin to know of the 700 investment professionals. Do the BIP people sit in with the BPY people,

and sit in with the BEP people? How do you construct all this so that you get everybody pulling the oars

together and on the same team and not the internecine warfare?

BRUCE FLATT:

Thanks for the question. So the good news is they’re all B’s. Here’s what I’d say. Fifteen years ago

when we started doing private funds, we had these businesses and we operated them all with our own

money and we made a very I think strategic decision at the time—it was very tough. In fact, most

people told us we couldn’t do it. But we decided that the funds we would raise would be Brookfield

funds and if we had essentially marketed these as, “You are buying Brookfield and if you’re going to

come to us and you’re going to come into your fund, no, no, no, you’re not getting that person or that

person or that person.” Yes, you’re going to get people focused on the business and on that fund but

what you’re really buying when you come to us, you’re buying the franchise of Brookfield and you’re

buying us as an organization. From that, our compensation plans are set to ensure that the client gets

taken care of, their compensation isn’t all based off of one fund or one thing or anything they do on a

daily basis, and therefore it’s created a culture in the organization that continued the business that we

always ran, which was you come to work, we’ll give you more opportunities than you’ve ever found with

anyone else. If the shareholder, whoever that shareholder is, makes a lot of money, you’re going to

make a lot of money, and you’re aligned with everyone.

Because of doing that, I’d say we’ve managed to avoid—look, there’s no doubt when we had 70 people

and when you have 700 people, the culture is not the same, but I think we’ve managed to keep

relatively low amounts of silos and people work across and we’ve done that by cross-pollinating. We’ve

26


moved people from business to business, sometimes not operating people that are in businesses but at

the investment level, and all of the senior people. To answer part of your question, all the senior people,

whether they work for the renewable business or the infrastructure business, property or private equity,

A) they all sit in the same offices globally. So our six main offices - São Paulo, Sydney, Toronto,

London, New York, etc., everyone is in the same office. B) most of them are compensated—in fact all

of them are compensated at the very senior level with Brookfield Asset Management compensation;

they have nothing to do with the funds. Whatever fund they do, whatever it is, they have no reason to

not be working for all of Brookfield Asset Management. Again, I’d say that was an important thing we

did early on to make sure the culture was right, and it carries down from there.

CHERILYN RADBOURNE:

Hi Bruce. It’s Cherilyn Radbourne from TD Securities. So we’ve seen an exponential increase in the

size of your private funds, which is typical of the industry pattern. Just wondering if you could talk about

the thought process that goes into deciding where to cap a particular fund and whether you think there

is some kind of practical limit on a single fund size at some stage?

BRUCE FLATT:

To paraphrase I’d say can we invest the money that we get in funds and do we try to limit the funds to

make sure that we don’t make stupid mistakes—you didn’t use that word—when we’re investing the

capital?

I’d just say that the business gets bigger all the time. We have three competitive advantages. Number

one is size. Number two is our global operations. Number three is our operating people.

Every day we try to make sure we have the operating people to build the business. Number two, we

continue to build out the global franchise. Few people have it. It’s an amazing thing for us to have.

And number one, size, I’d just say if you look back 20 years ago, 15 years ago, 10 years ago, even 5

years ago, I’m not sure that we understood the advantage of having the size that we have and the

ability to do the transactions we do. Many of the things we do come to us or are only offered to us or

we can react quicker or we can do them because of our size. So for now, I would say each of these

funds can get bigger. We can deploy the money. We’ve never had an issue in deploying the money

within the investment period. I think all the investments we’ve made have been excellent. We haven’t

moved from our adherence to the value principles of investing and that’s largely because of group

number two.

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We have a global franchise that few people have and therefore if the United States interest rates are

really low, you know what?—either we should be selling things or at least not buying anything in this

series, vintage of funds, but we’re going elsewhere, and therefore we can be in India or Brazil, we could

be in Australia, we could be in Europe, we could be in wherever else. Often, people don’t have that

luxury, and so I’d just say because of that global franchise we can continue to put money to work.

Specifically, there will be some point, I think, with funds where will we not be able to put the money to

work. It’s going to be our clients are not going to want to have the concentrations of size in a fund. So I

think there’s limits of where you get to. Private equity funds seem to have stopped at $20 billion. I

don’t think there is a private equity fund at greater than $20 billion. I think $20 billion seems to be in

people’s mind that that’s the size that they can go up to. I think infrastructure and real estate can

clearly be that size. Private equity clearly can. Over time that may grow as the world always gets

bigger, but I think it’s more just the size that institutions want and what we’re going to have to do then is

just start splitting out some of the areas where we do things, but for the time being we don’t really see it

as a governor.

MALE SPEAKER:

Thanks. Bruce, you talked about onboarding being a lot of work, taking your institutions to 1,000 from

450 today and client services key to keep your clients, and the clients or the institutions are getting

smaller. How does that impact the operating leverage in the asset manager? Can you grow and

service your clients and still produce the profits or improve the operating profit in the asset manager

going forward, or does that start to get diluted over time? Thanks.

BRIAN LAWSON:

I’ll take that one. Give Bruce a break here for a minute. Thanks, Bert. So there is a lot that goes on in

identifying the new client relationships and bringing them onboard. What I would say on that front is

that as much as we’ve made a tremendous amount of progress and increased the number of clients

significantly, investors over the past number of years, there are a number of areas that we are still

heavily underrepresented.

Even in a market like America where we have a lot of relationships with a lot of key investors, it is by far

the largest provider of funds to these sorts of strategies and if you look at any of our peers, the type of

capital they attract in America, we have a tremendous runway in that regard. Europe was another area

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that we’re very light on. I think it was 7% or something like that and part of that comes to having the

right kind of products that really appeal to European investors, and so we’re working on that as well,

and Asia. Bruce talked about the 15% limit now, the increase to the 15%, for example Chinese

insurance companies and other pools of very large pools of capital in Asia. So in our view, while we’ve

made a lot of progress, we’re just scratching the surface of the broader investment community.

MALE SPEAKER:

Thanks, Brian.

MALE SPEAKER:

Thank you, Bruce, for hosting us. Would you be kind enough to share with us, as an investor, a

mistake that you’ve regretted over your career and what lesson you draw from it?

BRUCE FLATT:

I can actually say this now. I’ve been doing it a long time, and I’d just say that we make mistakes all the

time and I’d say probably what we try to do always when we’re making mistakes is to, A) remember

them, and B) institutionalize them. So what we try to do is—and we keep a lot of our chairmen around

the company because decades can go by and you bring new people in and they’ve never seen a cycle

before. So I’d say we have different rules of things and if some of the great mistakes we’ve made is

buying dying businesses when we thought they were really, really cheap. Actually, they were just

really, really bad. Some people that work with me here will remember it, but we got a business for $1

and it cost us $200 million by the end of it. It’s just these are bad businesses. So over time what that’s

done to us and what we’ve tried to ingrain in the people in the organization is pay more and buy great

things. In the end they’ll work your way out and in the worst case scenario you’re going to get a little bit

lower return over a longer term and it just doesn’t matter. So I’d say we’ve learned to focus on quality

and great things.

Second, I’d say we’re in the development business in all of our businesses. Around our businesses we

probably have $10 billion or $15 billion of projects going on. We’re building toll roads. We’re building

pipelines. We’re building office buildings. We’re building malls. We don’t view ourselves as a

developer but because we’re in the business, around the edges and as a component of the business,

we’re always developing things and one of the mistakes I’d say we’ve made is buying portfolios of

assets that had development characteristics in them, especially in foreign places or in markets where

you don’t know because the locals can change the rules and you can lose value very, very quickly. So

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we buy lots of things but businesses you’re unsure of—Cyrus Madon was here talking earlier.

Someone asked him a question about buying a construction company. It’s tough to know 150 projects,

especially some of them are in the works, you’re building toll roads or you’re building some

infrastructure assets, it is very difficult to know what’s down underneath so we spend a lot of time

thinking about that and rarely do it. Usually we’re doing it organically because of the mistakes we’ve

made.

I’d say those are probably two large ones.

There’s a question over there and then we’ll come down here.

MALE SPEAKER:

Bruce, I don’t know that you mentioned your investment in Energy Future Holdings and I know that

various things have been going on. Could you briefly review what’s going on with BAM and where

you’re at now?

BRUCE FLATT:

I’m going to try, because I have the microphone, and if I don’t get it right, Cyrus Madon is sitting in the

front row there and I’m going to get him to add to this. If I say something incorrectly or if I mess it up.

We own a large position with some clients in Energy Future Holdings. It’s a utility in Texas. A

utility/generation company in Texas and the utility business is getting sold and what we’ll end up with

out of the reorganization will be a generation company in Texas which is a very large amount of the

generation capacity in Texas. It’s mostly coal and gas plants. It will emerge from bankruptcy by the

end of this year. We’re quite excited about the business and what we may be able to do with the

business. There’s two other large holders. I think we’ll be the largest owner of the shares when it

emerges from bankruptcy and we intend to use it as a business to grow with it and assist it.

Would you add anything else, Cyrus? Thank you.

There was a question I think down here.

MALE SPEAKER:

In an earlier slide you talked about the impact of interest rates rising at a gradual pace and how that

should be good for your business. Also in regards to negative interest rates you discussed how that

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wasn’t really something we were looking at, or maybe it was in a poll. I don’t recall. But is there an

economic environment over the next few years that you think might be detrimental to the Brookfield

business, or is there something that you think might slow the fundraising in the different various funds?

BRUCE FLATT:

You never say never. I’d say there’s nothing we see on the horizon of economic situation around the

world in the different countries that we operate that tells us there’s going to be an economic collapse.

In fact, I’d say the opposite. In the United States, things are good in most of the businesses. Housing

continues to grow. Housing-related businesses continue to grow. Everyone complains a lot but GDP is

positive and it’s going to be, it’s just going to be that way for the next while. It’s not going to be what we

used to remember was GDP growth in the United States. So I’d say economically we’re not that

worried.

On interest rates, what I would tell you is we used to say the long treasury at 4% will be just great for

our business. So we’re at 1.5% on the U.S. treasury today and I think it could go to 4% and our

business just works great. I don’t think you’re going to see 4% in the next while, but if you do it’s fine. I

think the only environment of interest rates will be problematic is a significant increase in interest rates

to a high amount and I don’t know what that amount is but I think anything over 4. If it goes to 5%, 6%

quickly then I think you’ll have enormous disruption in a number of industries, in particular the bond

market, but it would disrupt a lot and it would disrupt the business. We would be fine because we’ll just

start the engine over at that time but it’s not going to be very much fun for a few years to a lot of people.

I think that’s the one environment that if you believe that you should put your money in cash and you

should wait for that moment. We don’t believe that but that would be the one thing that would be

difficult.

Other than that, I guess we’re pretty either positive or neutral on what’s going on in the world.

MALE SPEAKER:

Following up, do you think the U.S. election could have any impact at all on any of your businesses?

Either way?

BRUCE FLATT:

I don’t think so. We’re just—we’re little people that buy things and no one cares about generally, so I

actually don’t think—especially in the United States of America. There’s great governance in this

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country and therefore it will be whatever it is and I really don’t think it matters.

Over the next 25 years, it’ll matter, governance matters, but in a 5- or 10-year period it doesn’t really

matter.

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