Brookfield CEO: Private vs. public markets, investment style and value creation

Hi everybody, I'm here with Bruce Flatts and it's really, really an honor to have you here. With $850 billion of assets, you are actually one of the largest alternative asset managers in the world. You've been here for more than 20 years and still going strong. And some people refer to you as the Warren Buffett of Canada, which is a pretty cool comparison. So pleasure to have you on.

Thank you, thank you for having me.

Now I wanted to start with a big question. So you have identified three megatrends as a firm decarbonization, deglobalization and digitalization, so if we start then with decarbonization, what are the investment opportunities in that field?

Look, the most interesting thing that's going on in the world today is that. And to put it in the most simplest terms, the age of gas and oil fueled everything. And what we now need to do is take carbon out of the energy system and industrial processes in the world. And really, it's just taking carbon out, and it's not that you have to have no carbon, it's you just have to have less. And the easiest way to do that is to build instead of using gas plants or thermal coal plants is to have renewables.

What type of renewable are you doing?

So we started in the water business, but you can't build many water plants anymore. And when wind became economic, we started building wind around the world. When solar became economic seven years ago, we started into solar big. We're the largest installer builder of solar plants in the world today.

And when you look forward, what do you think is going to be the dominant source?

Look, wind and solar are going to take very large market share. But the wind mostly blows at night and the sun only shines during the day, so there's an intermittency problem. And what's really important is that batteries become economic to be able to augment when you have power. And the good news is, just like solar and wind, the cost curve of batteries is coming down dramatically.

Can you just expand a bit on the nuclear option, because we don't talk so much about that in Europe?

No, look, it had a bad reputation for a long period of time. I think unfair. We bought Westinghouse.

Well, they did have some accidents.

Yeah, yes, yes. But the amount of deaths caused by coal and the amount of deaths that have been caused by nuclear are dramatically different, and coal is much higher. But the reputational issues are there.

Who's going to finance this whole energy transition?

Look, it's the good news today and I think this is actually what happened. People say, Oh, everyone thought it was a great thing now and we're going to change and all, be good and be green. But what really happened is that solar and wind today, in almost every country in the world, are the lowest cost energy, and that's what happened.

Is this going to be taken care of by companies which are already on the stock exchange or you in more like unlisted?

Look, I would say, yes. Some of it will be companies on the stock exchange. But are the pools of money, like Norges and that we deal with all around the world, sovereigns institutions? An enormous amount of this money there in these pools is perfect to fund the transition. Because it's private investment that earns good returns on a low risk basis, and it's doing well.

So these are companies such as U.S. pension funds, public entities, which give you money to finance the green transition.

So we started a transition fund three years ago, it invests in the backbone of the transition, so it's buying, building infrastructure for the transition. And the first pool of money we raised was a $15 billion fund, we're now raising a second fund.

And you think you'll make profits in that fund?

Not only are we going to make profits, we're going to make a very good profit. This targets 15 returns in the fund, it compounds over 10 15 years. These are excellent returns on a low risk basis. So we're doing, we're going to do good, but we're going to do well.

Do you think there is a philosophical question having people like yourselves owning large infrastructure projects?

Look, I think.

Shouldn't a state do all this?

You can.

Sorry for being a bit socialist in my question.

Private enterprise has proven to be highly effective at building and owning infrastructure around the world. And as long as the groups are responsible, as long as they do a good job. And remember, we own some of the most critical infrastructure on the planet, we own all of the gas pipelines. In Brazil, for example, we own all of the telecom towers of India. 60 of all the phone messages go across our telecom towers.

I mean, we have the fund, you know, this fund has compounded between 6 and 7, and already that's quite something. And what you say is that the projects you have can compound at twice that rate.

Yeah, and you know, as you compound at 6 and you have a broad. Because you need to keep a liquidity pool, you need to keep fixed income, so you have a more diversified portfolio. But for a component of that portfolio, if you can compound at 12 plus on a relatively low risk basis and not take hits, the difference in returns over the longer term are very, very dramatic.

Absolutely, oh, I can see why they call you the Warren Buffett of Canada. But hey, moving on to the second topic here De-globalization Why is that a mega trend?

So I think what happened, what happened in the last little while is the world I'd call it split.

I see that.

But part of it is it's diversification. They needed diversification as another D for their supply chains, where they got goods from, how they shipped, who they were dependent upon. Some of it is, I'd say high-end goods are moving back to places like America, so high-end electronics, super high-quality semiconductor chips, we're building. Intel's an Intel fab in Arizona. With them. Pharma at the very high end is moving back to countries because people are saying, I want my vaccine manufacturing facility here.

Now it's more expensive to produce close to home. What do you think it does to global inflation this particular trend?

So here's what I'd say is the things that are moving to the very expensive places are just the very high-end commodities. It's maybe a little more expensive. But the IRA Act in the United States is there to help facilitate that, so that's helping.

Inflation Reduction Act FYI.

Where the goods are going in all other parts of Asia, the costs are not that much different than what they are in China today. On balance, though, it's inflationary, and it probably puts a little more inflation into the world than you would have otherwise had. Although, you know this better than I do. But five years ago, all we talked about was deflation.

When you look at where to place businesses, how do you assess Europe versus the U?

Europe is an excellent place, it's a value market, it's not a growth market.

What does that mean?

It's a place where you need to understand your entry point and make sure you don't pay too much. Because growth is not significant.

And why is Europe not growing?

Population it has a small population growth rate is not significant, there isn't large in migration. And I think the entrepreneurialism isn't like America. If I had three, if I had to pick three.

Some examples of lack of entrepreneurialism.

I just think it, I'd say. The bankruptcy laws in the United States are conducive to people being entrepreneurial and starting over again, and they're not as conducive to that in Europe.

Like, you go bust quickly and move on.

Yes, yes, the bankruptcy laws in the United States. You deal with it, you move on, you come out, you start again. And I'm not saying I'm not making....

You can go bust and still be considered a proper citizen.

And still be the president of the United States.

For instance, Okay.

So the third mega trend on digitalization is really what you have behind your phone. So we identified basically, our infrastructure business is we move, we're behind the scenes of the global economy, we own all the backbone, and it's on moving people, goods.

So these would be data centers which would run things like Amazon web services.

Originally, it was that today it's large language models, training, and the amount of capacity being taken for that is almost unprecedented than anything we've seen before.

I saw an article saying that it could account for 3.

It is dramatic. The only good news is it's all green, and so our renewables business is providing enormous amounts of green capacity. Ten years ago, most of our capacity got sold to the grid, now most of it gets sold to corporates.

Are they the ones doing it because they have so much money that they can afford it?

Look I again, I go back to economics.

Now you say economics drive a lot of things, and you also said that you are seeing more inflation now. How does inflation change your investment outlook generally?

So, look, I would say the good news is today, maybe to start off with, is the Fed's actually done a very good job bringing inflation down. And the global central banks have cranked up interest rates, as you know, and they've tamped down inflation. So inflation is more or less getting under control, so we're not having 1970s like out of control inflation. We might have had that, but we're not going to have it.

You don't think we'll have it.

No, no, I think they've done a very effective job of tamping down inflation. For many of our businesses. It's actually a positive thing because, for example, infrastructure, we get paid a stream of income and it gets adjusted by CPI, monthly, quarterly, annually.

CPI is the price increase.

Yes, so inflation, we actually get an inflation adjuster, so if you had fixed rate financing, the interest costs are the same. The revenues are going up because of inflation, so many of our businesses, actually, they're positively disposed to inflation.

But you're also a big player in the property market, and this is not good for your real estate.

The reality is, the place where it affects us and affects groups like us is that. Higher inflation has meant higher interest rates for the time being, and that has affected the values of assets. The only thing I would say to you is first, a lot of property is financed with long-term mortgages, therefore the interest rates are the same as they were before. And secondly, it's the coupon that's relevant, not the Treasury rate, and the coupon is the combination of both the Treasury rate and the spread.

We're sitting in some pretty swanky offices here in the Hudson River.

This office where we are, it's 10 million square feet, it's 100 let. In fact, this office right now, you can see it's a pretty nice office. We have to move because we don't have enough space to expand one of our tenants and we're going to give them our space. But we have 30 million square feet in the city, we don't have another space to go to. So we're struggling right now to figure out where do we put our own offices because we're so full.

I'll tell you one thing, Bruce. We actually have some vacancy you can take at Norris Bank, we own some properties and I may have got something for you. We can make a deal here afterwards.

But I think the point is, high quality space is very highly sought after and rents are very high. But if you have poor space, poorly located in the wrong spots or in the wrong cities, it's very bad.

So you have a lot of different things, you've got property, you've got infrastructure projects, you've got all kinds of things. So now I'm going to give you $1 million, Where would you want to put it?

Look, I have been, we have been a believer in diversification.

You can't spread it out, you have to put it into one thing. Where would you put it now?

Am I a sovereign plan or an individual?

You are getting it as an individual.

I'd buy infrastructure and compound for the next 25 years at 14 percent.

The transition, energy transition. Okay, moving on a bit more to private markets generally, how do you? How have private markets changed since you started in this business, i...e. the unlisted part of the economy?

Look, our business is almost solely private markets. A group like us didn't exist 25 years ago when I started out trying to take. We were an operator of industrial businesses, we ran infrastructure, power plants and real estate for ourself, we just invested on our own behalf.

Okay, so we are in the boat together.

We're in the boat together. You, you. That did not. That industry didn't exist 25 years ago, and what's what's been created is something really, really interesting. Because now outside of the public markets, you can come with us. And you can own private assets and private businesses in a systematic basis with us or others like us and own those assets. And earn greater returns than you can in the in the public markets, or possibly be more assured of the outcomes versus the public markets.

Why?

As you know, the public markets, the value of businesses is this price, and the price of them goes up and down. In the public markets. Based on information that may or may not be relevant to each business, whereas in the private markets, when you and we own something, we control our outcome. We bought a business, it generates cash, we're growing it, we know exactly where we're going.

So do you think this will be sustained going forward as well, in a higher interest rate environment?

Yes, yes, this is not. This is not stopping interest rates. Interest rates are still very low, everyone focuses on.

What are what are some of the things that you can do in the unlisted market, which a public listed company couldn't do? Okay?

So, for for example, when we run a private business, we do not necessarily care what the quarterly earnings are. What we care about is the longterm value of the business. How we create customers, how we build the business, how we grow it, how we invest into it. And all of those things sometimes are in contrast to what quarterly earnings tell people they should be doing so. When you're a public company and you miss your quarterly earnings, sometimes, it's terrible. In the public markets, and and therefore people make decisions, I'd turn it around. People make decisions when they're in the public market which are not in the best interest of the business. And when you're in the private market, you are only focused on what's best for the business.

You are not the only ones doing this, you are up against competition, so how do you differentiate yourself against the likes of, you know, Blackstone and so on?

So our everyone in business should try to have some way to differentiate their capital, otherwise it's just capital. And our strategy over time has been we're very global, we're in 35 countries. We've built out a system to be able to invest in places and be value investors around the world. And often markets change. You asked about Europe earlier, the United States, they all change at different times. Our size gives us a scale that not too many others can compete with.

There has been historically some criticism of lack of transparency in this industry. How do your clients know what you actually do?

So what's really interesting is every quarter we give the numbers on each of the businesses we own with our clients, we take them through it. And we actually do valuations. So quarterly, annually, we do audits, and so we have 100 each one of our businesses, each one of our assets. We have 150 partners who are looking at the numbers and they're combining it into their results.

Is it more transparent than it was 10 years ago, 20 years ago?

I think we get, I think what it is is we get better all the time. We're learning. Remember, this industry started from nothing, 25 years ago, and we're getting better every day, providing information to clients.

So an investor in your fund gets full insights into what you do and the value of each part of it.

Yeah, each one takes advantage or capitalizes on it. Different. But some of the large ones sit on the boards of our companies with us, so they're very, very involved.

What about ESG?

So ES and G are all different. The E is really the transition, I'd say it's extremely important.

What do you think about the efficiency in the boards that you have compared to the listed companies?

Look, if I look at our public company we have, and a private business we have, the public companies we have, and we try to operate as close to a private one as we can. When you're in a public forum, but a lot of it's about governance and quarterly results and things that are going on in a private company. All we're doing is how are we driving value? and that's really the difference. how do we drive value out of a business every day?

So you think these funds, you think these boards are more efficient.

Yes, yes, and there's many things we can do in a private business, and I'll give you an example. We're trying to buy a business in Australia, which has it's in the energy transition and we're going to today. It distributes electricity to 2 million homes.

So, Bruce, you do all this work, you create all this value. But there is a perception that fees in this industry is very high.

So the first thing is, we have hurdles that we have to meet. So if we take capital from an institutional investor, they get an 8 return and they get that no matter what, if not, if we don't get that, we don't earn anything. So in the case where we only earn an 8 return, which I think the hurdles of your returns in the fund are around 8, so by investing with us, you can earn 8..

Absolutely, absolutely. There's also something called co-investments, so investors can put in additional investments on the side, right?

So many of our funds are large, but we have the largest institutions in the world with us. And the reason they come into the funds is because we also generate large co-investments beside the funds. And often we're bringing in those clients into direct investments with us. So, for example, we just bought a payments company in our private equity business, and.

Do large investors like us get better fees than small investors?

Yeah, so the way it breaks. If you're putting small amounts of money in a fund, we charge x. Large investors who put large sums in drive much better terms, and the fees are the least.

What is a good time to enter the private market?

I think actually 2024 will be a great time to invest in private markets. 2021 would not have been the right time because money was free.

Is that something you say every year?

Look, I would say that's a good question, I would say. Private markets in general have been, people should have been and have been allocating more money to private markets for the past 20 years. I think it's going to keep going for another 20 years. So the answer is yes. Although some vintages are better times, they're just better times to invest when markets are tougher.

Because there are a lot of negative articles in media these days, which I always think is good news, right?

It's good news, and so I would just say it's the interest rate chaos, the war. Like, leave aside all the situations that have happened. That creates animosity. It creates confusion out in the markets, and people are not sure where things are, and therefore capital is less freely available. The banks are constrained because of their own financial situations, and that just means valuations are better.

Bringing us on to your investment style. So there was an article in the Sunday Times where you say that your guiding principles are to buy cheaply. And having patience. Now, buying cheaply is pretty obvious, but tell me about the patience side.

You know, buying cheaply is not exactly obvious because you're never sure what's cheap. And I'd say that's the most important thing of what we do as a business is. We're assembling information all the time and trying to figure out, is it different this time or is it the same and what information do we have? But once you're into an investment, what you can't do is give up.

Well, you are you more patient now than you were when you were young?

Yes.

Isn't that really odd that we are young and we feel we are in such a hurry despite having a long time left? And now we are approaching death and we suddenly become really long term.

What's interesting is in golf your score goes down, tennis your score goes down.

So you became CEO when you were in your 30s, and now you are no longer in your 30s. So what's the main difference between the young Bruce Flatt and today's Bruce Flatt?

I would say I am similar to before, but I do different things. Today, we're training a whole new generation of people that are coming through the business and they will eventually take over this business. And the day that nobody knows my name and doesn't want to talk to me and wants to talk to them, I will have done my job.

How do you train them?

On the job, they're in the office all the time, we're working together, we're learning.

What type of people do you hire?

We hire people that are passionate about business and want to work hard. Of course, probably are above average smart, but mostly have an EQ. That allows them to deal with people and to grow a team, and teamwork is probably the most important thing.

And with EQ, you mean emotional.

It's just the ability to deal with people that's really, really important, especially in large businesses with large groups of people.

You say you're in the office all the time, and you personally really are in the office all the time, aren't you?

We have been in the office all the time. We have a view that the office is important. The interactivity of people within the office is important, and so that's a part of our culture.

But I mean, you personally also work all the time.

Yeah, look, I have a history of liking to work. It's something I enjoy and I would say it's different today than it was 30 years ago. Yes, I was in the office all the time, today I'm working all the time, but it's different.

You're doing well.

I'm at client management, I'm flying to a conference in some country to be with one of our clients or a number of our clients.

Why do you work so hard?

It's fun, it's fun the minute it isn't fun, I won't do it.

And what is it that makes it fun?

The people that you deal with every day, the sophistication of the clients and what they want to do. Accomplishing things that others may not be able to do, and building businesses, which some of them are incredible, some of the things we do and accomplish....

You talk about the importance of having a winning culture, what does that mean?

Look, our people want to be in a successful place and we try to have teamwork of people, we try to have teams of people. But we want them to win and we want them to be successful for our clients, and we want our clients to be successful.

How do you spend your time?

It's changed over the years. Probably a third of my time is client relationships, client and relationship related. I'm trying to solve at a high level for a client. The things that we can do for them, that can make us different and help them out. A third is people.

You say somewhere that you think employees should make small mistakes daily. what does that mean?

Nobody's ever perfect.

You said that one day, when nobody remembered who you were, then you'll have done your job. But you do want to leave a legacy behind. I suspect. What kind of legacy would you like to leave?

Look, we're trying to build Brookfield, and this is not just me, this is a group of people that have been with me for a long period of time. We're trying to build Brookfield into one of the great alternative investment managers on the planet.

What do you read?

I read business books, I like books on culture, I read a book on cryptocurrencies recently just because someone. I get books, I don't know if you get this, but I get five books every week sent to me.

I work in the public sector, so I have to buy them.

It was a really good book, but I like culture of countries and ethnicities, and so I read a lot of books on culture.

And what part of culture do you find particularly intriguing for the time being?

I find.

But you talk about culture and you say you were a North American. I mean, a North American is not. a North American, isn't a Canadian. Different from a U.S person or not.

I would say, you know what I've learned over the years, and I've lived in many places. I lived in New York for a long time, London part time, spent time all over the world. People are all the same, they're all the same.

Well, Bruce, you say everybody's the same. I'm not sure. I quite agree with that. I think you have done something really, really special here, you know? Big congratulations.

Thank you.