Breakingviews: Brookfield tries to keep up with the Schwarzmans

What’s the difference between Brookfield Asset Management and Blackstone? About $70 billion of market capitalization in the latter’s favor, for starters. Brookfield Chief Executive Bruce Flatt thinks the answer might be to break the Canadian financial group in two. While his logic is compelling, he might exchange one kind of complexity for another.

Brookfield and its U.S. rival had near-identical market capitalizations in early 2020. Since then, Steve Schwarzman’s firm has raced ahead. Similarities remain: Each hopes to manage $1 trillion of client money; Brookfield recently launched a non-listed real estate investment trust much like Blackstone’s. Yet look at Brookfield’s component parts, and the market may be missing something.

Blackstone’s worth breaks down into three parts. There are the fees it makes on its clients’ money, some $4.1 billion in 2021. Investors might value those on a multiple of 25, in line with Ares Management, which specializes in so-called alternative investments. Then there’s the lumpier “realizations”, or Blackstone’s $2.9 billion of profit from exiting investments. That might merit a lower multiple of 10. Add roughly $9 billion of still-uncrystallized investment profit, and the sum of Schwarzman’s parts is within striking distance of Blackstone’s $160 billion market capitalization.

Now apply that same logic to Brookfield. Factor in its $2 billion of fee-related earnings, its $2 billion or so of realizations, and $7 billion of unrealized investment gains, and the business Flatt is talking about spinning off is worth $77 billion. There’s also the $50 billion equity value of its own investments in energy, real estate and other hard assets. On paper, Brookfield is therefore worth nearly $130 billion – about a third more than it was even after Thursday’s 9% increase in the share price.

The question is whether Flatt can have his cake and eat it. Investors put off by Brookfield’s bricks-and-mortar investments may indeed pay a higher price for shares in a Blackstone-like spinoff. But the two businesses would remain shackled together, with the parent retaining control over its offspring. Meanwhile, the holding company would effectively be a clump of stakes in other companies, some of which investors can buy themselves. Flatt has drawn a dotted line, but keeping up with the Schwarzmans may require him to cut along it too.