Bruce Flatt (Brookfield CEO) – Interview with Norgest Bank Investment Management CEO (Dec 2023)
Chapters
00:00:01 Decarbonization, Deglobalization, and Digitalization: Investment Opportunities and Challenges
Investment Opportunities in Decarbonization: Decarbonization involves reducing carbon emissions in energy systems and industrial processes. Renewable energy sources like wind, solar, and batteries are becoming economically viable and replacing fossil fuels. Nuclear energy, particularly smaller and safer plants, has a role in the transition due to its continuous power generation.
Financing the Energy Transition: The transition to renewable energy is driven by economics, as they are now the lowest-cost energy source in many countries. Large pools of money from institutional investors, sovereign wealth funds, and pension funds are available to finance the transition. Private investment can provide lower cost of capital, efficient operations, and long-term growth for infrastructure projects.
Private Enterprise in Infrastructure Investment: Private enterprise has proven effective in building and owning infrastructure around the world. Governments and private companies can work together to ensure responsible ownership and operation of critical infrastructure. Private enterprise can provide lower costs, efficient operations, and long-term investment in infrastructure projects.
Deglobalization as a Megatrend: Deglobalization is driven by factors such as COVID-19, geopolitical issues, and the need for diversification in supply chains. High-end goods and specialized manufacturing are moving back to countries like America. Diversification of supply chains and manufacturing locations is becoming a priority for companies.
00:11:12 Global Economic Trends and Investment Opportunities
Changing Manufacturing Capacity and Its Impact on Global Inflation: Companies are diversifying manufacturing locations, reducing reliance on China, and moving operations to countries like Vietnam and India. Moving production closer to home is more expensive, potentially contributing to global inflation. The Inflation Reduction Act in the US aims to facilitate this transition by providing incentives for domestic manufacturing.
Europe as an Investment Destination: Europe is a value market with limited growth potential due to its small population growth and limited immigration. Entrepreneurialism in Europe is less pronounced compared to the US, impacting business formation and innovation. Bankruptcy laws in Europe are less conducive to entrepreneurship, making it difficult to start over after a business failure.
Digitalization and Infrastructure Investment: Digitalization is driving demand for data centers, fiber networks, and telecom towers. Data centers are increasingly used for artificial intelligence (AI) and machine learning, requiring enormous capacity. Renewable energy sources are being used to power these data centers, promoting sustainability. Technology companies are committed to net zero emissions and are investing in green capacity from renewable sources.
Impact of Inflation on Investment Outlook: Inflation has been brought under control by central banks raising interest rates. Infrastructure investments benefit from inflation as revenues are adjusted by CPI, increasing with price increases. Higher inflation has led to higher interest rates, affecting asset values, particularly in the real estate sector. High-quality real estate remains in high demand, with rents remaining elevated.
Diversification and Investment Allocation: Bruce Flatt emphasizes the importance of diversification in investments. Given $1 million to invest, Flatt would allocate it to infrastructure, particularly in the energy transition sector, with the expectation of 14% compounded returns over 25 years.
Changes in Private Markets: Private markets have experienced significant growth, surpassing the size of public markets. Private markets offer higher returns but also carry higher risks compared to public markets. Flatt believes that private markets will continue to grow and offer attractive investment opportunities.
00:21:33 Growth of Private Market Investment Opportunities
Bruce Flatt’s Background and the Evolution of Brookfield: Brookfield’s business has transformed from an operator of industrial businesses to a global private markets investment firm. The company’s growth strategy involved introducing partners into deals and creating funds to attract capital.
The Structure of Private Markets: In private markets, investors partner with firms like Brookfield to invest in private assets and businesses. Brookfield typically invests 20% of its own capital and brings in 80% from partners.
Advantages of Private Markets: Private markets offer the potential for greater returns and more assured outcomes compared to public markets. The value of private assets is not subject to the same fluctuations as public markets, which are influenced by information that may not be relevant to each business. In private markets, investors have more control over their outcomes as they own and manage the assets directly.
Sustainability of Private Markets in a Higher Interest Rate Environment: Despite rising interest rates, private markets are expected to continue growing and attracting investors. Interest rates remain relatively low, making private markets an attractive option for investors seeking higher returns and more control over their investments.
00:23:53 Understanding the Private Market Investment Strategies of Brookfield
Differentiating Factors: Private markets allow businesses to focus on long-term value, while public companies prioritize quarterly earnings, leading to decisions that may not benefit the business. Brookfield’s strategy emphasizes global reach, scale, and operational expertise gained from running businesses for decades.
Competitive Advantage: Brookfield’s size and scale offer advantages in terms of access to markets, resources, and expertise compared to competitors. Its industrial background enables it to operate businesses efficiently and effectively.
Transparency in the Industry: Brookfield provides quarterly and annual valuations, audited by 150 partners, ensuring transparency for its clients. Investors in Brookfield’s funds have access to the same results and insights as the company, fostering a high level of transparency.
ESG Focus: Brookfield recognizes the importance of environmental and social factors in its investment decisions. The company actively seeks opportunities to invest in sustainable and environmentally friendly businesses.
Governance and Regulatory Compliance: Brookfield emphasizes the importance of governance and regulatory compliance, ensuring that its operations adhere to the highest standards. The company’s strong governance practices contribute to its reputation and credibility among investors.
00:29:02 Private Markets: Driving Value and Growth
Governance in Private Markets: Bruce Flatt emphasizes the importance of the highest governance standards in private markets, as they operate with sophisticated institutional investors. Transparent information sharing and addressing mistakes promptly are crucial to maintain partnerships.
Efficiency of Private Boards: Flatt compares public and private boards, highlighting that private boards focus on driving value rather than quarterly results and governance concerns. Private boards are more efficient in making decisions and executing long-term strategies.
Private Markets Enable Transformative Investments: Flatt presents an example of a potential acquisition in Australia, where they plan to privatize and invest $20 billion in renewables while shutting down coal and gas plants. Such transformative investments would be difficult to execute in public markets due to market expectations and funding constraints.
Perception of High Fees in Private Markets: Flatt addresses the perception of high fees in the industry. He explains the hurdle rates that private market investors have to meet before earning any fees. If the hurdle rate of 8% is not achieved, the investors do not receive any returns.
00:32:26 Private Markets: Aligning Interests, Co-Investments, and Choosing Entry Points
Investing with Brookfield: Brookfield offers investment opportunities with an 8% minimum return, sharing any upside with investors after this threshold. Returns in private markets have been excellent for long-term investors.
Co-investments: Co-investments allow investors to make additional investments alongside Brookfield’s large funds. Large investors often invest in co-investments, which can have lower or no fees.
Fees for Different Investors: Fees charged depend on the amount invested, with smaller investors paying higher fees and large investors getting better terms and lower fees.
Ideal Time to Enter Private Markets: The current market conditions, with constrained banks, lower transaction activity, and institutional investor struggles, present a favorable time to enter private markets. The next 24 months are expected to offer excellent vintages for investments across various sectors.
Long-Term Trend of Private Markets: Private markets have been and will continue to be attractive for investors for the foreseeable future. Market conditions that create uncertainty and limited capital availability often lead to better deals and valuations for investors.
Patience in Investing: Patience is key in investing, as it allows investors to reap the benefits of long-term growth and value appreciation.
00:37:01 Navigating Organizational Change: Leadership, Culture, and Success
Bruce Flatt’s Investment Philosophy: Buying Cheaply: The key to successful investing is buying assets at a discount. It’s challenging to determine what’s cheap, but continuous information gathering and analysis are essential. Patience and Conviction: Once invested, it’s crucial to stay the course, even when markets decline. The best investments often involve periods of difficulty, but patience and conviction are essential for long-term success. Experience and Teamwork: Investing improves with age and experience. Combining the knowledge of experienced executives with the drive and innovation of younger professionals creates a strong investment team.
Bruce Flatt’s Management Style: Training and Development: Invest in training and developing the next generation of leaders. Provide on-the-job experience and opportunities to learn and grow. Hiring Passionate and Smart Individuals: Look for candidates passionate about business, willing to work hard, and possess a high EQ. Teamwork and the ability to deal with people are crucial qualities. Importance of the Office: The office environment fosters collaboration, interactivity, and a strong company culture. Hard Work and Enjoyment: Embrace hard work and find enjoyment in the process. The diversity of tasks and the opportunity to make a positive impact make work fulfilling. Client Relationships: Prioritize client relationships and strive to exceed their expectations. Investment Committees and Involvement: Actively participate in investment committees and decision-making processes. Provide guidance and support to investment teams when needed.
00:44:40 Culture, Innovation, and Legacy: Building a Powerful Organization
Embracing Mistakes for Progress: Bruce Flatt emphasizes the importance of allowing employees to make small mistakes daily. A culture that discourages mistakes stifles risk-taking and limits growth. Measured risks, not excessive bets, lead to improvement and innovation.
Legacy of Excellence: Flatt aims to build Brookfield into a leading alternative investment manager. The legacy lies in developing the next generation to surpass the achievements of the current leaders. A powerful organization emerges when each generation outperforms its predecessor.
Reading Habits and Cultural Interests: Flatt enjoys business books, especially those focused on culture. He reads about various cultures to gain insights into different perspectives. The Middle East and its complexities intrigue him, expanding his understanding of diverse regions.
Cultural Similarities and Differences: Flatt believes people worldwide share fundamental desires and aspirations. Cultural differences exist, but at the core, human wants and needs are universal. Americans and Canadians, while distinct in some ways, share common goals and values.
Conclusion: Bruce Flatt’s insights highlight the significance of embracing mistakes for progress, building a legacy of excellence, and appreciating cultural diversity. His belief in the fundamental similarities among people emphasizes the importance of understanding and embracing different cultures.
Abstract
Transforming the Global Landscape: Brookfield’s Strategic Shifts in Decarbonization, Deglobalization, Digitalization, and Private Markets
In an era marked by profound changes in global economic and technological paradigms, Brookfield stands as a vanguard, navigating through the complexities of decarbonization, deglobalization, digitalization, and the evolving landscape of private markets. With its strategic investments in renewable energy, digital infrastructure, and diversification of manufacturing bases, Brookfield is not only adapting to but also shaping these transformative trends. Their focus on long-term value creation, resilience in turbulent markets, and commitment to environmental stewardship positions them uniquely in the investment world. This article delves into the intricate web of Brookfield’s multifaceted strategy, revealing how they leverage opportunities in energy transition, infrastructure ownership, and private market growth, while upholding rigorous governance standards and fostering a culture of innovation and leadership development.
Decarbonization: A New Energy Paradigm
Brookfield’s pivot towards renewable energy sources like wind, solar, and nuclear exemplifies a broader shift in global energy dynamics. This transition, driven by the dual forces of climate change mitigation and economic viability, underscores the declining reliance on fossil fuels. Renewable energy sources like wind, solar, and batteries are becoming economically viable and replacing fossil fuels. Nuclear energy, particularly smaller and safer plants, has a role in the transition due to its continuous power generation. The transition to renewable energy is driven by economics, as they are now the lowest-cost energy source in many countries. Large pools of money from institutional investors, sovereign wealth funds, and pension funds are available to finance the transition. Private investment can provide lower cost of capital, efficient operations, and long-term growth for infrastructure projects.
Deglobalization: Navigating a Shifting Global Economy
The company’s strategic response to globalization’s retreat, hastened by COVID-19, geopolitical tensions, and supply chain vulnerabilities, involves diversifying operations and relocating high-end manufacturing. This approach mitigates risks associated with overreliance on specific regions. Deglobalization is driven by factors such as COVID-19, geopolitical issues, and the need for diversification in supply chains. High-end goods and specialized manufacturing are moving back to countries like America. Diversification of supply chains and manufacturing locations is becoming a priority for companies. Diversifying manufacturing locations, reducing reliance on China, and moving operations to countries like Vietnam and India are strategic moves in the face of deglobalization. Moving production closer to home is more expensive, potentially contributing to global inflation. The Inflation Reduction Act in the US aims to facilitate this transition by providing incentives for domestic manufacturing.
Digitalization: Pioneering the Digital Economy
As digitalization reshapes industries, Brookfield’s investments in data centers and fiber networks cater to the burgeoning digital economy. This digital thrust is creating new business models and amplifying demand for robust digital infrastructure. Digitalization is driving demand for data centers, fiber networks, and telecom towers. Data centers are increasingly used for artificial intelligence (AI) and machine learning, requiring enormous capacity. Renewable energy sources are being used to power these data centers, promoting sustainability. Technology companies are committed to net zero emissions and are investing in green capacity from renewable sources.
Investment Opportunities Amidst Market Changes
Brookfield identifies lucrative opportunities in low-carbon transition, deglobalization, and digitalization. Targeting 15% returns with minimal risk, the firm is raising substantial funds to invest in these areas, offering institutional investors attractive, long-term prospects.
Infrastructure Ownership: A Strategic Asset
The ownership and efficient operation of essential infrastructure like gas pipelines and telecom towers signify Brookfield’s belief in private enterprise’s efficacy. These investments appeal to institutional investors due to their long-term, low-risk nature and potential for steady returns. Private enterprise has proven effective in building and owning infrastructure around the world. Governments and private companies can work together to ensure responsible ownership and operation of critical infrastructure. Private enterprise can provide lower costs, efficient operations, and long-term investment in infrastructure projects.
Evolution and Advantages of Private Markets
Transitioning from a traditional business model, Brookfield has embraced private markets, creating funds that allow investors to co-invest, thus offering higher returns and more control over outcomes. This move towards private markets is anticipated to continue, even in a rising interest rate environment. Private markets have experienced significant growth, surpassing the size of public markets. Private markets offer higher returns but also carry higher risks compared to public markets. Flatt believes that private markets will continue to grow and offer attractive investment opportunities. Despite rising interest rates, private markets are expected to continue growing and attracting investors. Interest rates remain relatively low, making private markets an attractive option for investors seeking higher returns and more control over their investments.
The private markets offer unique advantages for investors, such as the ability to focus on long-term value creation rather than quarterly earnings, which is a common practice in public companies. Brookfield leverages its global reach, scale, and operational expertise gained from decades of running businesses to provide its clients with superior returns. Moreover, Brookfield emphasizes the highest governance standards and provides quarterly and annual valuations audited by 150 partners, ensuring transparency and fostering trust among its investors.
Investment Strategy and Transparency
Brookfield’s investment ethos centers on long-term value over short-term earnings. Their expansive global presence and operational expertise provide a competitive edge. Additionally, their commitment to transparency and rigorous governance standards reassures investors of their investment’s integrity. Brookfield’s business has transformed from an operator of industrial businesses to a global private markets investment firm. The company’s growth strategy involved introducing partners into deals and creating funds to attract capital. In private markets, investors partner with firms like Brookfield to invest in private assets and businesses. Brookfield typically invests 20% of its own capital and brings in 80% from partners. The value of private assets is not subject to the same fluctuations as public markets, which are influenced by information that may not be relevant to each business. In private markets, investors have more control over their outcomes as they own and manage the assets directly.
Environmental, Social, and Governance (ESG) Commitment
The firm places significant emphasis on energy transition and environmental stewardship, actively engaging in sustainability initiatives and responsible investing practices, marking their commitment to ESG principles.
Leadership and Corporate Culture
Under Bruce Flatt’s leadership, Brookfield fosters a culture that values patience, learning, and emotional intelligence, vital for nurturing future leaders. Flatt’s philosophy emphasizes a balance of experienced and young professionals, facilitating a dynamic and collaborative workplace. Brookfield’s evolution from an industrial company to a private markets investor is largely attributed to Bruce Flatt’s background and leadership. Flatt’s focus on introducing partners and creating funds has led to Brookfield’s growth and success in private markets.
Bruce Flatt, the mastermind behind Brookfield’s success, believes in prudent investing and teamwork. His philosophy centers around buying assets at a discount, remaining patient and convicted in investments, and combining the wisdom of experienced executives with the drive of young professionals. Flatt’s leadership style emphasizes developing the next generation of leaders, hiring passionate and smart individuals, and fostering a collaborative and enjoyable work environment. He prioritizes client relationships and actively participates in investment committees, providing guidance and support to investment teams. Flatt’s embrace of mistakes as opportunities for learning and his drive to build a legacy of excellence have shaped Brookfield’s culture and fueled its remarkable growth. His commitment to understanding diverse cultures and the shared aspirations of people worldwide underscores his belief in the universality of human wants and needs.
Challenges and Opportunities in Investment
Brookfield’s strategy also includes navigating challenges in public markets and leveraging co-investment opportunities. They aim to capitalize on the current market dynamics, with 2024 poised as an opportune time for investment, emphasizing the importance of entry points and patience. Europe is a value market with limited growth potential due to its small population growth and limited immigration. Entrepreneurialism in Europe is less pronounced compared to the US, impacting business formation and innovation. Bankruptcy laws in Europe are less conducive to entrepreneurship, making it difficult to start over after a business failure.
Setting a New Course in Investment
Brookfield’s multifaceted approach, from championing renewable energy to embracing digital transformation and advancing private markets, illustrates a comprehensive response to contemporary challenges. Their focus on long-term strategies, operational excellence, and a progressive corporate culture positions them at the forefront of a rapidly evolving investment landscape, setting a new benchmark for success and sustainability in the global market.
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