BBU is the youngest of Brookfield subsidiaries and is very different from the other three.
BAM benefits disproportionately from BBU’s success at the expense of retail investors.
Investing in BBU is similar to investing in a hedge fund and it should be considered as a fund rather than a company.
Some BBU deals are quite controversial and raise ethical issues.
It is risky to invest alongside BBU or in BBU-sponsored transactions.
The acquisition of Westinghouse nuclear energy services is expected to become a big success story for Brookfield Business Partners. Source
This post continues my series about Brookfield (BAM) related entities. Brookfield Business Partners (BBU) is the youngest of four flagship limited partnerships (we call them subsidiaries though technically they are not) and is different from the other three (BIP, BEP, BPY). You might remember a story of Odysseus who was very cautious approaching the island of sirens. Their songs were irresistible but sirens were far from harmless. BBU, in a way, reminds me of these sirens with investment shrewdness being its sweet song.
The detailed information about BBU is available on its site and I will be short. BAM span off BBU in June 2016 and still owns 63% of units. From time to time, BBU issues additional units and gradually reduces the BAM’s ownership. Like other subsidiaries, BBU is Bermuda-based, fully controlled and managed by BAM, pays BAM management fees equal to 1.25% of total capitalization (BBU has about 151 M of units outstanding; @ current $29 it is about $4.4B in market cap), provides K-1 tax form (or T5013 form in Canada), and is listed in both New York and Toronto. However, BBU differs in 3 crucial aspects:
“The intrinsic value of BBU’s units is best calculated as the present value of cashflows our operations will generate in the future.”
I would expect BBU to focus closely on each particular investment, trying to predict its long-term cash flows or asset values without any “grouping” and average multiples, purely on the bottom-up basis (except for some top-down diversification) similar to what most investors do with their portfolios.
Certainly, actual results are the only way to judge investment performance regardless of any PR. BBU’s investments more often than not imply complicated multi-step transactions with long investment cycles and the last judgment is due only upon full exit whenever it happens. BBU’s 4-year track record necessarily includes either transactions initiated by its predecessor (i.e. BAM’s private equity arm led by mostly the same team and we will not distinguish between them) or intermediate results. With these reservations, BBU’s returns are nothing short of incredible. The company states its objective as generating 15-20% returns but, typically, BBU produces IRRs of 20%+ when measured over a full investment cycle. Mistakes happen but they are rare. Below are some recent examples from materials on BBU’s site:
“For those who are new to our GrafTech story, this is a company which we acquired in 2015 for an equity purchase price of $855 million, our share of which was $295 million for a 34% stake in the business. In the past year, as a result of increasing demand and consolidating supplies, pricing for both graphite electrodes and petroleum needle coke increased very substantially. This enabled us to negotiate multi-year take-or-pay agreements for much of GrafTech’s production at weighted average contract pricing of $9,700 per metric tons (over the next five years), double the historical average pricing. These long-term contracts were only possible due to the unique advantage GrafTech has over other large-scale graphite electrode producers, which is that it manufactures most of its own petroleum needle coke, a critical material in the production of graphite electrodes.
All of this led us to complete a $1.5 billion debt issuance at GrafTech in February that resulted in a distribution of $384 million to Brookfield Business Partners. Following the end of the quarter, GrafTech issued a $750 million ($259 million to Brookfield Business Partners) dividend in the form of a promissory note and declared a cash dividend of $160 million ($55 million to Brookfield Business Partners). In April, we successfully completed an IPO of GrafTech for approximately 13% of the company at $15 per share, implying an enterprise value of approximately $7 billion. The offering generated gross proceeds of $571 million, or $197 million to Brookfield Business Partners.
At this valuation, our investment is worth $2.2 billion, an increase of over 6.5 times our initial investment of $295 million, including proceeds in cash and notes of $830 million already received.”