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For the last two decades, Bruce Flatt has been the CEO of Brookfield Asset Management, growing it to become the second-largest alternatives firm in the world. He oversees more than $725 billion in assets spanning a diverse portfolio comprised of real estate, private equity, infrastructure, energy transition, credit, and insurance.
Flatt brings his vast perspective to 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 below has been edited for length and clarity. See above for full video.)
Leslie Picker: I want to kick things off with kind of a bird's eye view, because you do have such a unique vantage point in the economy right now. And given all of the forces that have caused the public market sell-off - inflation, higher interest rates, concerns about geopolitics, China, Russia supply chain challenges, and the like - what's been the impact from your vantage point?
Bruce Flatt: Long-term wealth creation is about investing in great businesses with great people and compounding over the long term. So, despite wars, pandemics, explosions, recessions, and all the other things you just mentioned, over the past 30 years, we've just continued to buy great businesses, keep compounding and the returns have been excellent. And so, I guess I'd just say everyone just has to stay invested, not get too excited about the market gyrations that happen every day, and just keep with it. And that's the secret to success in investing.
Picker: Given what you're seeing in terms of the deal market. In real estate and the like — there are concerns about a recession, there are questions about whether we've reached the bottom — do you see any indications that either of those are on the horizon?
Flatt: The good news is corporate balance sheets are very strong. Personal balance sheets are very strong. If we have a recession, it's going to be a light recession and that's a good thing. But there's no doubt - look, we need to get inflation down around the world and it's either going to come down naturally, over time, or the central banks are going to cause it to come down. And those two scenarios paint differently, but they will be successful. We will get through all of this as we always do. And we will come out the other side. What's important for us is that inflation is very impactful in a positive way for real assets. And these are real return things that we invest into and they produce - they're highly cash generative, and that's a very positive thing for the type of things that we own.
Picker: How does that work? Why is inflation so positive, given that the cost of debt is going up?
Flatt: When we buy real assets, you put a lot of money in upfront. Your expenses are relatively small compared to that and your margins are high. So, when inflation impacts it impacts the whole asset, but it impacts the expenses only to a small extent. So, over time, the revenues compound much, much more when you get an inflation coming into the revenues and it impacts. Now, debt will go up a little bit if you don't have fixed rate leverage, but a lot of people that own these assets today have fixed rate leverage. If they were doing what they should have been doing, they were fixing their leverage over the past number of years at historic lows. But maybe just to step back, all of these assets work really well at low-ish interest rates and of all predictions going forward, we're going to have low-ish interest rates. We're not going to have as low as they were, but we're going to have low-ish rates, whether it's 3% on the Treasury, 4% on the Treasury, 5% on the Treasury, these assets that we own do really, really well.
Leslie Picker: So, five-ish does not scare you?
Flatt: No, no. I don't think we'll get there. But no.
Picker: You recently announced a pretty well-telegraphed plan to spin off the 25% stake in your asset management business. What are you looking to achieve from this transaction?
Flatt: Our business, on a whole, really has two parts that work together, but are very different. We have $75 billion of capital, which we've retained in the business over 30 years. And most haven't done that and therefore we're kind of unique in that perspective. And then we have an asset management business, and that business is just different. They work well together, but it's just different. So, we're spinning off to our shareholders 25% of that business. So all we're doing is dividing what each shareholder has into their main security and now they're going to own 25% of the asset management business themselves. Going forward though, a security owner can pick and choose, and probably many will just stay with us in the main company up top. But if somebody wants exposure just to the asset manager, they can buy that one exclusively. And I think it'll be good for shareholders, but it also, from an industrial perspective, it allows us to have a security which if we so choose to use it, we can use it in a single industry perspective. So, we could do M&A or other things with that security.
Picker: Reading between the tea leaves there it sounds like you may use that as a currency for potential further asset management M&A. I know you recently bought Oaktree, which was a very big deal in the asset management world.
Flatt: Howard Marks and Bruce Karsh are the best in credit investing. We didn't buy Oaktree, what we did is partner with them. So, we bought 65%, we bought the public out of Oaktree. They stayed as 35% owners and we're thrilled to be partners with them. And to do that we paid part cash and part shares of the parent company. We don't normally issue shares to the parent company and we don't really want to do that in the future. So, having a security that is the exact same as what we would be purchasing could be additive in the future if we ever want to do something like that again,
Picker: You recently notched $15 billion for your energy transition fund. What's your ultimate goal for this strategy? And how does it kind of fit into this current environment where, on one hand, you have all these concerns about energy security, given what's going on in Eastern Europe, and the dependence on Russian energy there, but then also this desire to have a cleaner ecosystem and less carbon intensive energy infrastructure around the world?
Flatt: We've been in the renewables business, starting with owning hydro plants from 30-40 years ago. We are one of the largest, today, in hydro, wind, and solar, and we continue to build that business out. That's the base of our energy transition fund. But in addition to that, we're providing capital to or buying businesses with carbon in them. So, for example, buying a business that generates electricity by coal but our job will be to convert that business over the next 10 years to less carbon. So, what's important here is not just saying we're going to be out of carbon-intensive businesses. Somebody has to do the hard work. So, what our job is, is to take the operating people we have, the capital we have, and help companies transition from here to here. Remember, we can't all be here, it can't all be renewables. So, we need to help people transition their balance sheets across.
Picker: Recently, there's been a high profile, proposed transaction out of your growth fund, the largest check from my understanding from your venture fund, which is to work with Elon Musk and his takeover of Twitter, contributing about $250 million worth of equity for that deal. What was the draw here? Why get involved with the Twitter takeover?
Flatt: We're building a growth business. Technology has always been really important. It's been growing in importance in the investment world. What didn't make sense in a lot of cases to us before and our main line businesses was valuation. And today, valuations are getting much more reasonable. So, I think it's going to, in all of our businesses, be much more important in the future because valuations are real. That specific situation you refer to, which I won't comment on the transaction, but we've had a long relationship with a number of investments with Tesla and Elon and therefore, it just, it emanated out of that.
Picker: What do you think are his motivations surrounding the deal and what are you hoping to achieve from it? Given just all the noise, all the hairiness.
Flatt: I won't make any more comments on it from there. Our relationship's with him and we're supportive, but look, our growth team think it's a good business.
Picker: You have been the CEO of Brookfield for two decades now, contributing significant returns for your shareholders. I did some calculations earlier, looks like about 10 times that of the S&P on a compounding basis going back to 2002, when you took over as CEO. What do you attribute that success to? And do you think that past returns are indicative of those in the future?
Flatt: The returns are about what you invest into, and whether you stick with it, and we got lucky. I'll take luck here. We got lucky, we got in the alternatives business. It's an incredible business. Interest rates went down a lot. Money piled up in institutional funds around the world and in wealth funds around the world and we've been able to build a business and relationships to put that money to work. So, that's the lucky part. Next, it's about execution. And we've made lots of little mistakes, but not that many big ones. And therefore, execution has been pretty good. And we stuck with it, and a lot of success is just sticking with it. So, we've had a pretty good run. To the future, look, I think there's still a big runway for another 10 years in this business, and therefore we're excited and part of the reason we're splitting one more time, the business, is we see a lot of runway for growth in the future.