CEO of world’s second-largest alternatives company optimistic about mild recession

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For the past two decades, Bruce Flatt has been Brookfield Asset Management, making it the second largest alternatives company in the world. He oversees more than $725 billion in assets spanning a diverse portfolio of real estate, private equity, infrastructure, energy transition, credit and insurance.

Flatter brings his broad perspective in an exclusive interview with CNBC’s Delivering Alpha newsletter, where he explains why he’s not too concerned about the many headwinds facing the economy today.

(The following has been edited for length and clarity. See above for full video.)

Leslie Peake: I want to start with a bird’s eye view because you do have such a unique advantage in the economy right now. Considering all the factors that led to the sell-off in the open market — inflation, higher interest rates, geopolitical concerns, supply chain challenges in China, Russia, etc. — what’s the impact from your perspective?

Bruce Flat: Long-term wealth creation means investing in great businesses with great people and compounding interest over the long term. So despite the wars, the pandemics, the explosions, the recessions and all the other things you just mentioned, we’ve just continued to acquire great businesses for the past 30 years, compounded constantly, and the returns were pretty good. So, I guess I just want to say that everyone has to keep investing, don’t get too excited about the market volatility that happens every day, and stick with it. This is the secret to successful investing.

Selector: Given what you see in terms of trading the market. In areas like real estate — there are fears of a recession, there are questions about whether we’ve bottomed out — are you seeing any signs that any of that is coming?

Flat: The good news is that corporate balance sheets are very strong. Personal balance sheets are very strong. If we have a recession, it’s going to be a mild recession, and that’s a good thing. But there’s no question — look, we need to get inflation down around the world, and it’s either going to come down naturally and over time, or central banks will cause it to come down. The two situations are portrayed differently, but they will succeed. We will get through this as usual. We will come out the other side. What is important to us is that inflation has a very positive effect on real assets. These are the things that we invest in and produce that really pay off — they have a high cash-generating capacity, which is a very positive thing for the type of things we have.

Selector: How does this work? Given that the cost of debt is rising, why is inflation so positive?

Flat: When we buy physical assets, you invest a lot of money first. Compared to this, your fees are relatively small, and your profit margins are high. So when inflation affects, it affects the entire asset, but only to a small extent, fees. As a result, income compounded more over time as inflation entered and had an impact. Now, if you don’t have fixed-rate leverage, the debt goes up a little bit, but a lot of people who own these assets today have fixed-rate leverage. If they’re doing what they’re supposed to be doing, they’ve pinned their leverage over the past few years at historic lows. But maybe just taking a step back, all these assets are doing well with low interest rates, and in all forecasts, we’re going to have low interest rates. We’re not going to be as low as we used to be, but we’re going to have low rates, whether it’s 3% for the Treasury, 4% for the Treasury, 5% for the Treasury, these assets that we have are doing very, very well.

Leslie Peake: So, five people won’t scare you?

Flat: no no. I don’t think we’ll get there. but not.

Selector: You recently announced a very clear plan to divest your 25% stake in the asset management business. What do you hope to get out of this deal?

Flat: Overall, our business does have two parts that work together, but are very different. We have $75 billion in capital and we have been in business for over 30 years. Most people haven’t done that yet, so we are unique from that perspective. Then we have an asset management business, and that business is just different. They work great together, but it’s just different. Therefore, we spin off 25% of the business to our shareholders. So what we’ve done is split each shareholder’s assets into their primary securities, and they’ll now own 25% of the asset management business themselves. Going forward, though, security owners can pick and choose, and probably many will stay with our main company. But if someone just wants access to asset managers, they can buy exclusively. And I think it’s good for shareholders, but from an industry perspective it also allows us to have a security that we can use from a single industry perspective if we choose to use it. So we can do M&A or something with that security.

Selector: Reading between the tea leaves, it sounds like you could use it as a currency for potential further asset management M&A. I understand that you recently acquired Oaktree, which is a very big deal in the asset management space.

Flat: Howard Marks and Bruce Karsh are leaders in credit investing. We didn’t acquire Oaktree, what we did was partner with them. So, we bought 65%, we bought the public from Oaktree. They retain 35% of the owners and we are happy to partner with them. For this, we paid some cash and some shares of the parent company. We generally do not issue stock to the parent company, and we do not want to do so in the future. So if we want to do something similar again, owning the exact same securities that we will buy may increase in the future,

Selector: You recently raised $15 billion for your Energy Transition Fund. What is the ultimate goal of your strategy? And how does it fit into the current environment, on the one hand you have all these concerns about energy security given what’s going on in Eastern Europe and the reliance on Russian energy, but also the desire to have a cleaner ecosystem and more Less carbon-intensive energy infrastructure?

Flat: We have been in the renewable energy business, starting with hydroelectric power plants 30-40 years ago. Today, we are one of the largest companies in hydro, wind and solar, and we continue to expand that business. This is the foundation of our Energy Transition Fund. But beyond that, we also fund or buy carbon-containing businesses. So, for example, buy a business that generates electricity from coal, but our job is to turn that business into reducing carbon emissions over the next 10 years. So the important thing here is not just to say we’re going to get out of carbon-intensive businesses. Someone has to do the hard work. So, our job is to use the operations people we have, the capital we have, to help the company transition from here to here. Remember, we can’t all be here, and we can’t all be renewable energy. So we need to help people transform their balance sheets.

Selector: Recently, your growth fund had a high-profile proposed deal, and as far as I know, your venture fund’s biggest deal was a partnership with Elon Musk and the acquisition of Twitter, contributing about $250 million to the deal Equity. What’s the draw here? Why get involved in a Twitter acquisition?

Flat: We are building a growing business. Technology has always been very important. Its importance in the investment world is growing day by day. What didn’t make sense to us and our main business in many cases before was the valuation. Today, valuations have become more reasonable. So, I think in all of our businesses it’s going to be more important going forward because the valuations are real. That specific situation you mentioned, I’m not going to comment on the deal, but we have a long-term relationship with a lot of Tesla and Elon’s investments, so that’s where it came from.

Selector: What do you think was his motivation surrounding the deal? What do you hope to get out of this? Given all the noise, all the furry.

Flat: I won’t comment on this from there. We have a relationship with him, we’re supportive, but look, our growth team thinks it’s a good business.

Selector: You have served as CEO of Brookfield for twenty years and have delivered substantial returns to your shareholders. I did some calculations earlier, and from 2002, when you took over as CEO, compounded, it looks like it’s about 10 times the S&P. What do you attribute this success to? Do you think past returns predict future returns?

Flat: The return is about what you invest in and whether you stick with it, and we’re lucky. I’ll try my luck here. Luckily for us, we got into the alternative business. It’s an incredible business. Interest rates have come down a lot. Money is piling up in institutional funds and wealth funds around the world, and we’ve been able to build the business and relationships to put that money to work. So, this is the lucky part. Next, it’s about execution. We made a lot of small mistakes, but not so many big ones. So the execution is very good. We persevere, and a lot of success is perseverance. So, we’re running very well. Going forward, look, I think there’s still 10 years of big runway for this business, so we’re excited, and part of the reason we’re splitting the business up again is that we’re seeing a lot of runway for future growth.

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