BROOKFIELD ASSET MANAGEMENT LTD
TSX:BAM
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Earnings Call Analysis
Q2-2024 Analysis
BROOKFIELD ASSET MANAGEMENT LTD
In the second quarter, Brookfield Asset Management demonstrated robust financial results, marked by significant capital growth and strong fundraising efforts. The company earned $1.1 billion in fee revenues during the quarter, contributing to a total of $4.5 billion over the past 12 months, which represents increases of 6% and 5%, respectively, year-over-year. The company’s fee-related earnings (FRE) stood at $583 million for the quarter and $2.3 billion over the 12-month period, reflecting increases of 6% and 4%, respectively. Distributed earnings (DE) were $548 million for the quarter and $2.2 billion for the past 12 months, up 4% and 3%, respectively, year-over-year. Notably, the company’s fee-bearing capital surpassed the $0.5 trillion mark, reaching $514 billion, an increase of 12% over the past three months and 17% year-over-year.
Brookfield’s fundraising capabilities were highlighted by the $68 billion raised during the quarter, with a large portion attributed to its insurance solutions channel. The closing of the AEL mandate added significantly to the fee-bearing insurance capital, which now totals $88 billion. The company plans to allocate a portion of this capital into private funds over time, which will generate additional fee revenues. Brookfield also reported strong fundraising in its credit group, which saw a 19% year-over-year growth in fee revenues for the second quarter. The company raised $8 billion for its credit strategies and $1.5 billion within its real estate platform during the quarter. Additionally, $1 billion was raised within infrastructure, and $500 million within private equity to support new and ongoing strategies.
The acquisition of Castlelake is expected to further diversify Brookfield’s product offerings. Additionally, Brookfield’s insurance solutions channel continues to benefit from its partnership with Brookfield Reinsurance, which anticipates increased annuity writing abilities. A significant portion of AEL capital, currently held in liquid credit positions, will be deployed into private funds over the next one to two years, enhancing fee revenues. Brookfield’s private equity segment saw notable growth, with over $500 million raised during the quarter, including contributions from new strategies like Pinegrove Capital Partners. These efforts align with Brookfield’s prediction of bringing in an additional $1 trillion of assets under management (AUM) over the next four years.
A key strength of Brookfield is the stability and predictability of its earnings, with 87% of its fee-bearing capital associated with long-term or permanent capital. Margins improved to 55%, up 1% from the previous quarter, showcasing the benefits of operating leverage derived from the credit platforms and insurance solutions fundraising. The company remains focused on realizing the hidden value in its funds, which are expected to generate significant earnings from 2028 onwards. This anticipation is driven by the stable growth and consistent performance of its diverse investment strategies.
Despite recent market volatility, Brookfield maintains a positive outlook on the overall market conditions. The company believes that declining interest rates paired with robust growth fundamentals create a favorable environment for transactions. The strong labor market and significant market liquidity further bolster this view. As interest rates begin to decline, Brookfield expects increased transaction activity and higher valuations in its key investment sectors. The company’s diversified platform, expansive global footprint, and experienced management team position it well to capitalize on these market trends.
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Hello, and welcome to Brookfield Asset Management's Second Quarter 2024 Conference Call and Webcast. [Operator Instructions]
I would now like to hand the conference call over to our first speaker, Mr. Jason Fooks, Managing Director, Investor Relations. Please go ahead.
Thank you for joining us today for Brookfield Asset Management's earnings call. On the call today, we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, our President; and Hadley Peer Marshall, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor, who will talk about some of the important themes we're focused on across the business, and finally Hadley will discuss our financial results and business operations. After our formal comments, we'll turn the call over to the operator and take analyst questions. In order to accommodate all those who want to ask questions, we ask that you refrain from asking more than 2 questions at one time. If you have additional questions, please rejoin the queue and we'll happy to take questions at the end if time permits.
Before we begin, I'd like to remind you that in today's comments, including in responding to questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events and results may differ materially from such statements. For further information on these risks and their potential impacts on our Company, please see our filings with the securities regulators in Canada and the United States and the information available on our website.
And with that, I'll turn the call over to Bruce.
Thank you, and good morning to everyone on the call. We are pleased to report strong results and $68 billion of capital raised in the second quarter. As a result, we're now managing approximately $1 trillion of assets.
Our scale and growth have allowed us to deliver strong returns and serve our clients better. This expansion has only been possible because of the talent and dedication to excellence of our over 2,400 investment and asset management professionals and nearly a quarter million operating employees around the world.
Our history, though, goes back, as most of you know, 125 years, with the founding of the light Company, introducing the first electric streetcars and infrastructure to Brazil. Over the decades, we expanded in many different asset classes, but always with a focus on essential assets with durable cash flows backed by a contrarian investment mindset and a disciplined approach to investing.
Today, we are the foremost leader in backbone infrastructure investing. Our renewable and transition platform is a leader and we have the largest fund of its kind. We also continue to grow with partnerships like our deal with Oaktree, our premier credit manager.
This year we announced the formation of our Brookfield Credit Group, incorporating our longstanding private credit and direct lending funds and our marquee partnerships with all of our other credit managers. And today, in total, we manage approximately $300 billion of credit assets, ranking us among the largest alternative credit lenders.
For the first portion of our history, we owned and operated assets for our own benefit. It was only 25 years ago we launched our first private fund out of our private equity vertical. We established Brookfield Capital Partners I, which raised $400 million. Our growth in private equity is representative of how we expanded our broader business. Since the inception of our fund offerings in private equity, we have invested out of 6 funds over 20 years and have generated a 27% gross IRR, 21% net IRR. These are exceptional returns and have allowed us to scale our fund size to $12 billion and growing.
Today, within our private equity franchise, we manage approximately $130 billion of assets, including a number of large-scale, high-quality, market-leading businesses. So while we have grown, our principles have not changed. We focus on acquiring, on a value basis, business that provide essential products and services and which generate resilient cash flows. We use modest leverage and rely heavily on our deep operating capabilities to deliver outsized returns over the investment period.
However, the types of businesses that we do acquire and the industries we focus on have evolved. For example, in our private equity business, it's now global, whereas when we started it was North American focused. We've broadened our sector focus to include software, healthcare, and recently we began investing in the backbone payment and financial infrastructure around the world as we believe that certain megatrends are driving a transformation of the global financial system.
This strategy has proven to be very attractive to our clients and we have leveraged our success in the flagship series to not only increase the size of our funds, but to also diversify our product offerings. We're also in the market with the second vintage of our special investment fund, which is focused on providing flexible and strategic capital through customized, structured solutions.
We recently launched a Middle East strategy, which seek to make control and non-control investments and also a strategy for financial infrastructure investing, which seeks to invest in asset-light financial infrastructure companies that underpin the global financial system. Our heritage as an owner and operator differentiates us from many others and has been instrumental in our success for 3 main reasons.
First, it means that we always have been able to provide more than just capital to management teams we partner with. Second, it means that we can derisk our investments in our portfolios as we have a global knowledge in the businesses we buy. And third, it means that we are able to generate returns not simply by using leverage, but by also driving operational efficiencies, growing cash flows and enhancing the assets we own. This approach of using operational value creation is responsible for more than half the returns we have generated for our investors in our private equity business and virtually all of our businesses.
As we continue to deliver target returns and as we evolve with the market and the needs of our clients, we see a strong path to significantly scaling the size of our private equity business. Consistent with the last 25 years, the key will be delivering strong investment performance.
In summary, we have large access to permanent capital base. We're publicly listed affiliates with our renewable power infrastructure and private equity businesses. We're growing private wealth and insurance capital basis as we continue to seek opportunities to grow our asset management capabilities, both organically and through strategic M&A. Our recent acquisition of Castlelake, a premier aviation and specialty finance manager, is a prime example of that.
Throughout our history, the Brookfield ecosystem has been the cornerstone of our strength and success. The structure allows us to share experience, identify value, underwrite deals in a unique manner, fostering growth and a strong sense of alignment across all of our public and private affiliates. The results speak for themselves.
Our flagship funds have hit or exceeded their target returns, generating significant value for all of our clients. Our relationship with our client is built on trust, partnership, and value creation, rewarded us with more capital and continue to grow into more areas. As we look to the future, we will continue to build on our legacy of innovation, growth and partnership.
On that note, I will pass the call over to Connor who will highlight some of the themes we are focused on right now. Connor, over to you.
Thank you, Bruce. The global economy has made great strides towards a better balance of solid growth and modest inflation. Global central banks have begun cutting interest rates amidst declining price pressures and the normalization from a previously very tight labor market.
Growth is moving toward trend rates in major economies and will be underpinned by further reductions in short-term interest rates that are expected over the next year. Business sentiment remains positive and capital expenditure is robust, despite elevated geopolitical uncertainty. Although equity markets have been somewhat volatile in recent weeks, risk appetite and liquidity and capital markets remain strong, supporting transaction activity in the segments in which we operate.
Even before markets began to improve going back to last year, we were able to maintain strong and consistent fundraising levels due to; 1, the diversity of our product set. Two, our long-term track record in delivering top notch risk adjusted returns. And 3, our access to many different forms of capital.
With these improving market dynamics, we are seeing strength across all fronts of our business. We are finding that on the disposition front, our investments continue to attract competitive bids. With several sales processes underway, we anticipate significant monetization activity in the second half of the year, which we expect will crystallize a number of very attractive returns.
At the same time, credit spreads have meaningfully tightened and this has opened up financing opportunities across our portfolio at attractive levels. So far this year, we have executed $75 billion of financings, which includes $20 billion in the term loan refinancing market, achieving an average of 45 basis points of spread tightening and then extending the average tenure of debt by approximately 2 years.
As markets have become more favorable, having access to among the largest pools of capital globally is one of our competitive advantages, which enables us to pursue large-scale transactions away from the more commoditized parts of the market. And with deal activity increasing, we see further momentum on the deployment front across all of our businesses, putting us in a prime position given our more than $100 billion of available capital.
We deployed or committed approximately $20 billion of capital during the quarter, and in particular we are seeing opportunities to execute large-scale, attractive investments. During the second quarter, we committed to a number of such transactions.
The first of these was GEMS Education, a leading private education provider based in the Middle East that we agreed to acquire in partnership with its founder for a $2 billion investment. This transaction highlights our continued commitment to the Middle East, a region we anticipate will sustain its high growth trajectory.
Key to our ability to be successful in the region, but really anywhere in the world, are our deep relationships, extensive experience, and local presence. We have been an active investor and collaborator in the Middle East since the late 1990s, even before we established ourselves as an asset manager.
Currently, our teams in Dubai and Saudi Arabia comprise of almost 100 people. These investments -- this investment, sorry, will go into our private equity group, special investment fund and our Middle East partners fund and is expected to be completed in the third quarter.
Post quarter end, we announced the acquisition of nVent Electric's electrothermal solutions business for $850 million of equity out of our flagship private equity fund. This business is the #1 designer and manufacturer of electric heat trace systems products and services, which is mission critical for enabling operational safety and efficiency for many essential industries.
And lastly, we agreed to acquire a majority stake in Neoen, a leading global renewables development business, in a public to private transaction that values the equity of the business at approximately $7 billion. This is not only the largest equity investment that we have ever made out of our renewable power business, but ranks among the largest equity investments Brookfield has ever made. This investment, backed by our second global transition fund, will enhance our clean energy capacity, particularly in Europe and Asia. We anticipate closing this transaction by the first quarter of 2025.
The acquisition of Neoen is representative of our leadership in the renewable power and transition space. We were able to offer a compelling solution to the existing owners, leveraging our access to capital, capabilities, and geographic reach to acquire a large, high-quality global platform in high-value renewables markets around the world.
Perhaps most importantly, our ability to partner with large-scale institutional capital allowed us to provide a complete solution that few could match. While the transaction size is large, this is an example of the type of deal that leverages the core competencies of our business and allows us to capitalize further on the accelerating growth trends we are seeing today.
Our 40-year-old renewables business is the largest globally and is expected to continue to benefit from strong momentum and pickup in transactions. This year, we have seen substantial deal activity. Our pipeline is perhaps the largest it's ever been, driven by 3 major tailwinds. First and foremost, economic factors. Renewable power has become the cheapest source of new electricity in many regions, allowing us to be the provider of a critical commodity that the global economy increasingly needs.
Second, sustainability as companies seek to procure more clean energy. And third, strategic considerations with countries and corporates increasingly viewing energy security as a major priority. The AI revolution that is rapidly taking hold is shining a spotlight on all 3 of these trends. While the demand for data centers on the back of AI has been well covered, what is increasingly important to underscore is that the bottleneck for AI development is increasing the access to power.
Renewable power, transmission, and distributed generation are critical infrastructures that are currently insufficient, but essential for supporting AI's expansion. Our unique position as operators of one of the largest data center businesses as well as one of the largest renewable power businesses in the world, allows us to build the backbone behind this technological transformation. This dual presence enables us to deliver comprehensive solutions at scale, providing our data center clients with reliable sources of clean power.
Our Microsoft agreement is a good example of our value to customers. This groundbreaking agreement is almost 8 times larger than the largest single corporate PPA ever signed. It covers over 10.5 gigawatts of new renewable energy capacity that will be delivered between 2026 and 2030 in the U.S. and Europe, with potential expansion to other regions. This partnership represents over $10 billion of investment and supports Microsoft's growing demand for cloud services, while contributing to grid decarbonization by accelerating the global shift to renewable energy across wind, solar, and other impactful carbon-free energy generation technologies.
Being at the intersection of AI growth and renewable energy development, positions Brookfield uniquely to capitalize on these trends. We can provide our clients with scalable, integrated solutions that meet their needs, both for advanced data centers and sustainable energy sources.
This capability not only enhances our service offering, but also create substantial value for our clients, reinforcing Brookfield as a leader in both sectors. To put it simply, nobody is better placed to invest in and provide clean power on a global basis to fuel this AI revolution.
Another major area of growth for Brookfield has been our credit business, which has grown to over $300 billion of assets. The growth of our credit business has been the biggest driver in our revenue growth over the past 12 months, with second quarter credit revenues up 19%. We expect this growth to continue trending upwards for a few reasons. With improvement in the market, M&A deal pickup is creating even more opportunities to deploy capital through all of our credit strategies. In addition, our acquisition of Castlelake should be closing shortly and will be further additive to our product diversification.
Further, our insurance solutions channel continues to also benefit, as our largest client, Brookfield Reinsurance, is expecting to see a step up in their annuity writing abilities and our first third-party insurance solutions SMA has recently closed. It is important to note that most of the AEL capital that we began managing this quarter is currently in liquid credit positions. We'll be actively deploying a meaningful portion of this capital over the next 1 to 2 years into private funds, which will generate additional fee revenues for us.
As we look ahead, we feel good about the momentum across our businesses and that the largest global trend still remain advantageous to our assets. Our focus remains on how we can continue to generate value for our clients, and we believe that should lead to us bringing in another trillion of AUM over the next 4 years.
With that, we will turn the call over to Hadley.
Thank you, Connor, and good morning, everyone. For this morning's call, I'll focus my remarks on 3 key objectives. First, I'll provide an update on our financial performance in the quarter on the back of strong capital growth and explain the annualized effects of our earnings potential from this capital. Second, I will highlight our fundraising and deployment capabilities and discuss how the breadth of our platform and complementary offerings will continue to drive growth. And third, we have a light balance sheet with strong liquidity, so I'll provide an update on our liquidity and strategic uses of our balance sheet before opening it up to questions.
Let me start by providing some details on our financial performance in the quarter. We earned $1.1 billion of fee revenues in the quarter and $4.5 billion over the last 12 months, representing increases of 6% and 5%, respectively, over the prior year period. On a fee-related earnings or FRE basis, we earned $583 million in the quarter and $2.3 billion over the last 12 months, up 6% and 4% respectively, over the prior year periods. On a distributed earnings or DE basis, we earned $548 million in the quarter and $2.2 billion over the last 12 months, up 4% and 3%, respectively, over the prior year periods. These results, on a per share basis, reflect $0.36 per share of FRE and $0.34 per share of DE.
Earnings increases in the quarter were largely driven by $68 billion of fundraising, with a large portion coming from our insurance channel, which included the closing of the AEL mandate in mid-May. This brings our fee-bearing insurance capital to $88 billion.
As Connor mentioned, we plan to continue to allocate a portion of this capital into our private funds over time, which will earn additional fees for us. Given we only received management fees on the AEL mandate for part of the quarter, we find it useful to annualize fee-related earnings that were in place at the end of the quarter to highlight how much we've grown over a year.
This is not based on forward growth, only in place as of the end of the quarter. On this basis, FRE and DE at the end of the quarter were $2.5 billion and $2.4 billion, up 11% and 12%, respectively, over the prior year quarters. We expect these annualized growth rates to better reflect the earnings power of the business going forward. Fee-bearing capital surpassed the $0.5 trillion mark and sits at $514 billion, up 12% over the past 3 months and 17% year-over-year.
Fee-bearing capital increases were largely driven by the addition of capital through our insurance solutions channel as well as the capital raised within our flagship funds and deployment across our credit business and complementary strategies. One of the key strengths of our business that I want to emphasize is the composition of our earnings, which benefits from stability and predictability.
This stems from the fact that 87% of our fee-bearing capital is associated with long-term or permanent capital, and that percentage should only continue to grow over time. In addition, approximately 100% of our DE are composed of our fee-related earnings, but most excitedly there's no carried interest in the numbers. It is quickly building our funds for realization in years 2028 and onward. This will propel earnings at that time and is like hidden value today.
Our margins were up 1% from the prior quarter at 55%. This improvement is the first sign of the benefit we're experiencing from the operating leverage we are generating from the further buildout of our business, especially the credit platforms and insurance solutions fundraising channels.
In fact, our credit group has experienced 19% growth in its fee revenues relative to the second quarter of 2023. As discussed previously, we were investing in the team ahead of these revenues. And now with the revenue increases, our financials and in particular, our margins will continue to see the benefit.
Taking a closer look at our fundraising in the quarter, as previously mentioned, we raised $68 billion, $53 billion of which is associated with our insurance solutions channel.
In addition, our complementary strategies are growing their contribution to capital raising and our in market flagships continue to provide a strong foundation with the expectation of them being larger contributors in future periods as they reach final closes. Of the remaining capital raise, $4 billion was within our renewable power and transition business. We expect to hold the additional closes for our global transition flagship fund and later this year, our first close in our catalytic transition fund.
Within our Credit Group, we raised a total of $8 billion of capital, most notably across our opportunistic credit fund, our life sciences income fund, our value opportunities fund. Additionally, we held a first close of $500 million in the latest vintage of our music royalty platform Primary Wave. Within our infrastructure business, without our flagship in the market, we raised almost $1 billion, primarily within our private wealth and perpetual institutional infrastructure funds. The fundraising within the latter fund is particularly of note, raising its highest quarter total in 2 years.
Within our real estate business, we raised $1.1 billion, including additional capital for the fifth vintage of our opportunistic real estate flagship fund, bringing the total fund strategy to approximately $9 billion. And within private equity, we raised over $500 million. This was primarily associated with inaugural strategy at Pinegrove Capital Partners, bringing that total fund size to approximately $800 million.
We're actively fundraising for numerous other complementary funds within our private equity business, including within our Middle Eastern partners and financial infrastructure funds, as well as inaugural vintage of our private equity secondaries fund and the second vintage for our special investments fund. We anticipate holding first closes for all of these by the end of the year.
Wrapping up on fundraising, we have a long runway ahead for growth. We're able to draw capital -- we're able to draw in capital across a wide array of investors, including institutional, private wealth, and insurance clients. We have a diverse geographic footprint from which we raise funds, including a growing presence in the Middle East and Asia, where we recently launched multiple regional targeted funds as well. And we continue to expand our fund offerings into new asset classes, which will enable us to sustain our fundraising through flagship fund cycles and further propel our capital-based growth and subsequently fee-bearing capital growth.
Turning now to our capital deployments, we deployed or committed to deploy approximately $20 billion in the quarter, bringing our last 12 months total to approximately $50 billion. Of note, we deployed $6 billion across our credit portfolio, including $2.2 billion within the eleventh and twelfth vintages of our opportunistic credit flagship fund and $1.1 billion within our strategic credit fund. We deployed $1.5 billion across our real estate platform, including approximately $500 million into a U.S. multifamily portfolio within the fifth vintage of our opportunistic real estate flagship fund.
In addition to this capital deployed, as Connor discussed, we committed $10 billion to the quarter for new acquisitions that will close in subsequent quarters and many deals underway, given the compelling opportunity set. Overall, we expect our deployment volumes to be robust throughout the remainder of the year.
Finally, I'd like to provide an update on Brookfield's liquidity, our available capital, and corporate balance sheet. At the end of the second quarter, we had $107 billion of uncalled fund commitments across 5 business groups. Of this capital, currently $56 billion is earning fees and $51 billion will earn fees once deployed, or slightly over $500 million in annual fee revenues.
Looking at the balance sheet, we had $1.9 billion of cash on hand at the end of the quarter, a change of approximately $700 million. We've been actively putting our cash to work to support our businesses. As an example, we acquired an additional 5% ownership of Oaktree, bringing our current stake to 73%. In addition, we continue to support our complementary fund and new strategies with GP Capital, with a focus on allocating capital to strategies that will drive meaningful RFE to BAM -- to Brookfield.
Before beginning the Q&A portion of today's call, I'm pleased to confirm that the Board of Directors has declared a dividend of $0.38 per share for the second quarter, payable on September 27, 2024, to shareholders of record as of the close of business on August 30, 2024.
I'll wrap up my remarks by quickly reminding everyone that our up and coming Investor Day for Brookfield Asset Management is scheduled to be in New York on September 10, and we'll also be webcasting the event. We look forward to presenting an update to our 5-year forecast and highlighting the best of what's going on across the Brookfield ecosystem.
With that, operator, we can open it up to questions.
[Operator Instructions] Our first question comes from the line of Cherilyn Radbourne with TD Cowen.
First question is on something you talked about in the letter where you mentioned your unique position as the largest combined renewable power and infrastructure investor. Can you talk about how that's showing up in your deal pipeline and whether there's an opportunity to do something really differentiated, where you're developing both the data centers and the renewable power source jointly or something of that nature?
Thanks, Cherilyn, and good morning. You're absolutely right. And maybe just to provide a little bit of market context, the growth in infrastructure to support AI and cloud compute, the numbers are very dramatic and the capital required are quite staggering. And this demand is all being driven by the hyperscalers, the largest, fastest-growing, most profitable companies around the world.
And we're in a very fortunate position to be on the leading front foot in providing both of the key inputs to that infrastructure. For the last period of time, it's been very obvious that the shortage has increasingly been in data center capacity, and this has driven a huge build-out in data centers in recent years, and a trend that's only going to continue from now until the end of the decade and beyond.
But increasingly now, the bottleneck to bringing more data center capacity online is having power to support those new, more energy-intensive data center projects. And we are very fortunate to be the largest provider of power to corporates around the world. To-date, we have been providing those 2 critical inputs, I would say separately to the same customers, the large hyperscalers; the Microsoft, the Amazons, the Googles, the Metas of the world. But increasingly, over time, it is only logical that there is an opportunity to further differentiate yourself by providing holistic solutions.
We are seeing this market mature very, very rapidly, and that is the direction of travel. And as the market increasingly goes that direction, we would be comfortable saying that we are absolutely the largest player with leading exposure across both data centers and renewable power to support those large hyperscalers, on the scale and the geographic reach that is required for their businesses.
As a quick follow-up, can you touch on the progress that has been made backfilling BGTF I and when you expect that to be complete?
Certainly. So you're touching on a broader theme, which is across our business we would say within our renewable power and transition platform that is without doubt, where we are seeing the greatest amount of transaction activity. Obviously, we announced a very large transaction in Neoen in this past quarter, but that was only one of a number of deals that we executed.
And therefore, in terms of deployment, we already have in the pipeline all the deals that we need to fill up the remainder of BGTF I and return our focus into deploying BGTF II.
So we would expect to complete that process very, very imminently. And I would say it's important to recognize that when we look to BGTF II, we're already approximately 20% deployed on that fund. Maybe just the last thing that I would highlight, is we did touch in our remarks about how we are seeing a number of opportunities to monetize assets what will deliver very, very attractive returns for ourselves and our partners.
I would say a large portion of those are within the renewable power and transition business, where our experience and tenure in that asset class really differentiates us, and allows us to take advantage of the market demand that we're seeing.
And our next question comes from the line of Alex Blostein of Goldman Sachs.
So Brookfield has significant amount of embedded revenues, as you highlighted earlier, I think it's $510 million. Once you activate various funds or capital gets deployed, I don't think that includes any incremental rotation of capital into private strategies from your insurance business. So can you talk to the kind of the opportunity you see there? I think it's about $88 billion of fee-bearing capital, 33% private credit SMAs, 3% private markets, and the rest is in liquid. So what's sort of the destination for this mix, and over what time frame you think you can get there? And maybe you could also help us to contextualize what type of revenue pickup you could see on the back of it?
Thanks, Alex. And just for everyone's benefit, the biggest growth driver within our insurance and credit business over the next 12 months, is very simply going to be the run rating of the AEL mandate that only closed in May, flowing through our numbers for the next 4 quarters. And that's going to drive very, very meaningful growth in both our revenues as well as our margins.
As we had made very significant investments into that platform ahead of that revenue coming online. But, well, that growth in revenue is just naturally going to play out. What Alex is getting at is within the AEL portfolio that we have recently taken management of, about 60% of that portfolio, north of 60% of that portfolio is in liquids. And therefore, over the next 1 to 2 years, we will be able to rotate a portion of those liquid securities into our fund mandates.
And when we do so, that will not only drive returns for that portfolio, but also drive additional fee revenue on that capital. Without giving a specific direction, given that we're at 60% in liquids today, we do expect a very meaningful rotation into our funds business. We would put that well into the multiple 10s of percentiles over the next 1 to 2 years. And what that will do in terms of driving FRE, we would say it's a fairly material impact over the next 2 to 3 years as that begins to run rate through our numbers as well.
And then question on the margins. And Hadley, welcome to your first earnings call here. In the past, I think Brookfield spoke to north of 60% FRE margin and at like a BAM, share level. I think that number is running something in the 55%, 56% over the last several quarters. Maybe just update us on what that target looks like? Is that 60%, or higher still the right destination? And at what point do you expect to ultimately get there?
Thank you, Alex, and I'm happy to be here. I've been in the seat for a couple of months and our margin improvement has been a little delayed. But I'm very encouraged with the operating leverage in our business, and where I see profitability going. If you take a step back, and you look at our cost growth that's moderated, and it's up about 6% over the prior year.
If you look at last year this time, our costs were up approximately -- 12% over the previous 12 months. So that's reflected in the build-out that we did in order to support our credit franchise, and the $88 billion of insurance capital that we now have flowing in as well as both, so Brookfield Oaktree Wealth Solutions, our retail business. And so, now we're seeing that operating leverage benefit our margins.
Though you're only seeing it in early days, it's only up about 1%. But as an example, if you were to assume full -- a full quarter of AEL, that alone would improve our margins by another 100 basis points. And then given the expected growth of our fee-bearing capital throughout the rest of the year, we continue to see the benefit to our margins. And then we've got the captive growth, the undrawn capital that we discussed, which has got the earnings power of about $500 million.
And then as we've already discussed, the $49 billion of insurance capital that we're going to allocate to -- some of it to our private funds. And then over the next 12 months, we're going to be acquiring more of our FRE at accretive levels, which will be helpful for our growth. And that's the Castlelake acquisition, more of Oaktree and some other smaller initiatives. So all of that plus additional strategies and M&A will be accretive to our growth and to our margins.
But is the 60% still kind of the right number to think about over time?
Yes, I mean, we're very much focused on the improvement going up. And just right now, if you think about the AEL, we're at 56% adjusted, so 60% is attainable.
And our next question comes from the line of Craig Siegenthaler of Bank of America.
So as everyone on this call knows, we had several bad economic data points last week, and many investors and economists are raising their prospects for a recession or slowdown. Now you guys have insight into hundreds of portfolio companies and properties, including proprietary insights on CapEx consumer spending, real estate, rental rates. So do you think the public markets have overreacted to the last few days of bad economic data?
No doubt the last 10 days have seen quite a bit of volatility. I don't think that can be understated, but we would very much be of the view that the market backdrop, is still very increasingly constructive for transactions, particularly in the segments that we operate. Growth continues to be at, I would say, above normalized level. Labor markets remain robust.
I would say credit spreads, obviously, there was some volatility in the last 7 days, but credit spreads are still directionally tightening, and there is still very significant liquidity in the market. And all of this is against a backdrop of interest rates are only now beginning to be lowered by central banks, and that's only going to underpin a more constructive growth environment going forward.
So while the last 7 to 10 days have seen some volatility, it is not at this point in any way causing us to waiver from a very constructive view of the market, and one that's going to see more transaction activity. And we would suggest increasing valuations across the sectors that we invest in.
And just as my follow-up, and I heard the response there in the prepared commentary, that you expect transaction activity to go up from here. But if I break it up into investing and then realization, you expect both of them to have upside potential into the second half, or do you see one side stronger than the other?
Both have upside potential into the second half, but perhaps here's the way to frame it. We've been very active on the investment side for the last 12 to 18 months, even though some of the market uncertainty of 2023. And we think those investment decisions are going to age very well. And while we do expect transaction activity to accelerate from here, it is coming off a pretty active base level.
The difference on monetizations is we also expect monetization activity to increase from here, but it's coming off a much lower base. And we've been, I would say, selective in terms of our monetizations within different asset classes for the last 6 to 12 months. But increasingly we are seeing robust bids for high-quality derisked assets in core markets.
And therefore, we're expecting to see an increase in activity that will probably be greater on a relative basis on the monetization side, just because we're coming off a lower base level.
And our next question comes from the line of Brian Bedell of Deutsche Bank.
Maybe just to come back to the comment of the growing another trillion in assets over 4 years, I'm sure you're going to cover this in a lot more detail on Investor Day, but is that -- are you sensing that would be all organic, or would include acquisitions, as you have done historically, particularly in the insurance segment? And then maybe too granular, but what portion of that you think would be fee-bearing?
Great. So first and foremost, we expect the vast majority of our growth to come organically. And from that standpoint, we're incredibly encouraged by the fundamentals that we're seeing within our business to deliver on that. One really interesting dynamic within the last quarter has been, the strength in our fundraising was really across our complementary strategies.
And those tend to be new or earlier vintage funds, that there is a lot of effort to get them off the ground, but then they tend to scale much more meaningfully in the future. And given the support and the success we're seeing in those strategies, that gives us a lot of comfort around organic growth, given some of the other expansion initiatives we already have on the go.
No doubt, we will continue to be opportunistic from an M&A standpoint. But the vast majority of the growth we intend to deliver, and our business plans is always based on organic. The other point that is important to recognize, and I don't know if you want to count this as organic or M&A, but within our business, we have an incredibly sizable option to acquire more of the earnings of our affiliate managers at very attractive levels.
And that's something else that we will do that will drive a lot of FRE growth over that time period, although it won't change as much in terms of AUM and fee-bearing capital that's already included in our numbers. The second comment just around how much of that growth is going to be fee-bearing versus -- how much of that AUM growth is going to be fee-bearing.
We would expect the vast majority of it. The biggest component of that growth is going to be in the insurance and credit platform of our business. And almost the entirety of that platform is fee-bearing capital.
And maybe just a housekeeping question on the Global Transition Fund II, I think you had put that on a temporary fee holiday given you wanted to backfill Global, GTF I. Is that coming off -- is that getting turned back on for the third quarter, or -- and/or is that included in the annualized rate that you put in on Slide 25?
So what we would say, again, just reiterating the tremendous amount of opportunity within the renewable power and transition space, all the deals we need to fill out BGTF I and really round out that portfolio, and assure that it has the appropriate construction for our partners. Those are all in advanced stages, so we would expect to see the second vintage of that fund turned on in the relatively short-term, and should absolutely be contributing to our results well before year-end.
And our next question comes from the line of Ken Worthington of JPMorgan.
In 4Q, you guided to $90 billion to $100 billion of flow expectations for 2024, excluding AEL and the 2023 flows that slipped into early 2024. Based on your definition, how much have you raised thus far this year? And with the number of flagships sort of getting bigger in market in 3Q and 4Q, how are you feeling about achieving that $90 billion to $100 billion goal for the year?
So perhaps I'll start, and then we can follow-up with some numbers. I would say in terms of the range we communicated, we feel very comfortable around the fundraising momentum we have, and finishing directionally within that range. I think there's 2 important things to note. 1, we touched upon in a previous question. In Q2, we saw tremendous fundraising for our complementary strategies.
And that's really encouraging and important dynamic, because Q2 was actually relatively light in terms of fundraising for our flagships. Our flagships are all obviously our most mature strategies and ones where we have the highest conviction. So, we expect to see significant amounts of fundraising for those flagships that we have in the market, whether it be across credit, real estate, transition, as those all move towards final close later this year.
So in terms of the range that we previously communicated, we do feel very, very good about that. In terms of specific numbers, I would say around taking into account the adjustments, no AEL, not including the amounts done early in this year that were attributed previous year, we're at about $30 billion thus far.
So lots of interest in your realization comments from the sell side here. You highlighted renewables, are those realizations expected to come from any renewable product in particular, and any sense of magnitude? And how do you see realizations in your other asset classes, as we think about the second half of the year? So real estate, private equity, maybe infra more broadly than renewables. Any thoughts there?
Sure. So perhaps some broad color, maybe just to close out on renewables in transition. We're fortunate to have not only the largest franchise, but the most longstanding franchise, and therefore a number of the investments we made 6, 7, 8, 9, 10 years ago, before the sector was as large or in focus as it was today, those assets are now primed for monetization, and will deliver very attractive returns for our investors.
And we're perhaps in a unique position, given our scale of assets in that asset class that are available for monetization, given how much larger we are than others in that space. The other sector that, I would say, is improving very dramatically in terms of monetizations would be private equity. Liquidity for high-quality assets in that asset class has come back quite dramatically.
This is driven by lending, this is driven by tightening of spreads, and the fact that there is a lot of liquidity in that system. Therefore, we would expect to see monetization activity again of scale in that asset class and then maybe just comparing to other asset classes, I would say, on the real estate side, it is still a little bit more opportunistic. High-quality, best-in-class assets continue to attract very robust bids and significant demand, and we will continue to play into that as we have in recent quarters.
But I would say that monetization activity in real estate will be more asset-specific than broad-based. I'd say that's quite representative of the opportunity we see on the investment side, where we are seeing tremendous opportunities, to put capital to work on the real estate side, where there is still some caution in the sector.
And our next question comes from the line of Dan Fannon of Jefferies.
I wanted to follow-up on the insurance segment, post the AEL assets coming onboard, how you're thinking about growth prospectively for that channel? And also the prospects of other insurance SMAs, or partnerships coming online and maybe just additional commentary there would be helpful?
Thanks, and welcome to the call. Two obvious areas of growth within our insurance platform are; 1, and apologies for being redundant about this, but it is very dramatic. Very simply, the run rating of the AEL mandate that we only got a handful of weeks of in Q2 will play out in our insurance numbers over the next 12 months. The other important point to highlight here is really something we're seeing across our broader wealth business.
Which is managing insurance on behalf of individuals, as well as what we're seeing in our retail channel, where there is very significant demand. And candidly, we would say the demand we're seeing from these channels, we're really dictating our pace of growth. Well, not a function of BAM, we simply manage the capital. BN Re is running at a rate of underrating $15 billion to $20 billion of new insurance annuities each year.
That will be a growth lever for our business. And then, similarly -- in our retail wealth products, I would say this is 1 component of our business where we are actually limiting our fundraising based on the deployment. And as we deploy more capital, we're going to see much more significant fund inflows into our retail channel as well. So, I would say, in terms of your insurance growth, the obvious one is run rating of numbers.
The second one is the insurance annuities. And then, maybe the last 1, I would just highlight is a bit of a milestone on our side. We just completed our first insurance SMA this past quarter, and that's a growth lever for our business, and we expect to do more of that activity in the years to come.
And then, I guess, just rounding that out, what was the total contribution from the wealth channel, as you guys define it in the quarter, in terms of net inflows?
About $2 billion.
And our next question comes from the line of Geoff Kwan of RBC Capital Markets.
My first question was just on the catalytic fund. Just wondering if there's any insight you can provide in terms of, like, on the interest? Is there overlap from investors that participate in the Global Transition Fund? Are you seeing any new investors that are not there? And maybe, given the mandate, potential new investors in new geographies that you haven't historically fundraised from?
Thanks, Jeff. The answer to both of your questions is, yes. I would say there is a tremendous amount of overlap. I'd almost put it in 3 buckets, if you would. There's a tremendous amount of overlap in investors within our renewable power and transition platform that, invest across a multiple number of products within that platform, and our Catalytic Transition Fund, we expect to be a beneficiary of that. That would be bucket 1.
Bucket 2 is one of the large initiatives we have within our fundraising group, is to increasingly cross-sell products. This is a huge growth opportunity, something we've spoken about at last year's Investor Day. And another opportunity for the Catalytic Transition Fund, is to cater to investors that are invested somewhere else within Brookfield. Maybe not BGTF, but we can also partner with them on CTF.
And then the last bucket, is a nice one that you highlighted. CTF is a very unique strategy, given the markets it focuses on and the supportive and catalytic capital that has already been committed. We are beginning to see interest from a bunch of, what I would call, completely new investors to the Brookfield franchise. And that's clearly a benefit to expanding our product offering, and increasingly providing more of these complementary strategies.
And just my second question here, in terms of call it the M&A environment, are you seeing or have you been seeing more disciplined on competitor bidding, just reflecting higher interest rates in the current macro environment? So maybe it's paying some degree of lower multiples than before when interest rates were much lower. Or are you seeing bidding activity as maybe a bit more aggressive and you would expect, whether or not that's, say, competitors need to deploy capital before the commitment periods end, or just maybe what you might view is a little bit more aggressive bidding?
We would not suggest that the market is overly exuberant and we're seeing a rational competitive bidding. The system is liquid. I would say, the transaction activity is improving, but we would suggest that it's in a very, very constructive range. We're coming out of an environment where for a period of time, there's been a larger gap between the bid and the ask, between buyers and sellers.
The way we would describe the current environment, with rates stabilizing even now declining and liquidity improving, is we're just seeing that bid-ask close and that's going to lead to more transaction activity. We certainly wouldn't suggest at this point that we're seeing overly aggressive or irrational bidding behavior. Marks feel very constructive is the word that we would use to describe what we're seeing.
And our next question comes from the line of Nik Priebe of CIBC Capital Markets.
In the opening remarks, I think you alluded to the prospect of some larger-scale exits in the second half of the year. I just wanted to confirm it's safe to assume any larger realizations will be sourced for more mature funded fund vintages whose inception would have predated the spinoff of BAM. And therefore would not be carry eligible to BAM specifically. So given the visibility that you have on the pipeline, is that a fair expectation?
That is absolutely fair. And due to the way that we separated carry at the time of the spin-off, you are absolutely correct that the carry that will be generated from those monetization events, will not necessarily be for BAM's account. I do still think it is tremendously positive, in demonstrating the performance of the franchise, as well as delivering for our clients that can then turnaround, and reinvest that capital with us in new vintages. But you are correct, and we'll be abundantly clear about that. The carry generated on these monetizations will not be for BAM's account.
And our next question comes from the line of Mario Saric of Scotiabank.
Just want to come back to a thematic question as it pertains to the relationship between fundraising, central bank monetary policy, and economic growth. So internally, how do you view the impact of using monetary policy versus greater uncertainty over the pace of U.S. real GDP growth that was referenced earlier in another question, as it pertains to LP commitment confidence? And then secondly, kind of as it pertains to accelerating monetization activity, I guess what I'm asking is, while I realize that monetary policy is directly linked to the economy and I guess a long-term alternative wallet spend increasing amongst LPs, I guess I'm asking the shorter term, which do you think is more relevant for LP commitments and completion of transactions?
To tackle your question head-on, we think the decline in interest rates is the single biggest driver that drives increased confidence in the market that will, particularly for cash-generative real assets, that will push values up. As your question appropriately outlines, there's always a variety of factors, but we see declining interest rates paired with, I would say a robust, albeit slowing growth profile creates that constructive market environment we spoke about. But the declining interest rates, really to see the pickup in transaction activity, we simply needed rates to stabilize.
We got that, I would say, in the early part of the year. Now we're moving even into a more positive environment where rates are beginning to decline. That's the single biggest driver in our minds around deal activity and just growing market confidence, which to your question then flows into things like institutional commitments.
And this concludes the question-and-answer session. I would now like to turn it back to Jason for closing remarks.
Okay, great. Thanks for everyone's interest. If you should have additional questions on today's release, please feel free to contact me directly. Thank you, everyone, for joining us.
This concludes today's conference call. Thank you for participating. You may now disconnect.