Chanticleer

Brookfield’s inflation-fighting superpower

Brookfield boss Bruce Flatt says the firm’s focus on real assets provides a benefit as inflation rises. Here’s how.

Jun 16, 2022 – 12.00am

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Bruce Flatt, the chief executive of $US700 billion ($1 trillion) private capital giant Brookfield, has to be one of the most relaxed customers in global markets.

Flatt can see a recession coming, but whether it arrives this year, next year or in 2024 doesn’t faze him too much – recessions happen in the course of normal business cycles, he says.

Good stuff: Brookfield CEO Bruce Flatt – “We own real, backbone things.” David Rowe

Yes, rates are going up, but Flatt points out they’re not going to 9 per cent or anything really dramatic – the lower-for-longer dynamic is still in play, and the institutional investors Brookfield serves are still piling into private capital markets.

“They are going into alternatives because they need to earn returns to match their liabilities, and get a proper return on capital they have. I don’t think that’s stopping for a while,” he says.

And while inflation is going up, Flatt says that’s a positive for Brookfield, which he says owns a portfolio mainly made up of real assets – or, as he calls it, stuff.

“If you think of our business in general, we own real, backbone things. Toll roads, pipelines, office buildings, retail centres, renewable energy plants, transmission lines.

“The simplest way to think about it, there’s a positive impact to them to the cash flow margin with inflation.”

Flatt explains it this way. Think of a poles and wire business in the energy sector, which Brookfield buys, safe in the knowledge the revenues it will receive are linked to inflation.

Because Brookfield spends a lot of money upfront, its ongoing costs are lower. So, as inflation rises, it gets 100 per cent of the benefit on the revenue side, but the inflation hit on the cost side has been minimised by Brookfield’s big upfront spend. The result is better margins.

Not only that, but where Brookfield might have expected the poles and wire business to grow revenue at 2 per cent, it is now compounding at a higher rate thanks to inflation.

“That’s the simple concept across our $US700 billion worth of stuff,” he says. “Everything’s not perfect, but 80 per cent of it is probably positively impacted in some way by positive inflation.”

Another reason Flatt is relaxed about the economic downturn he predicts is that it should make it easier for Brookfield to act as a classic contrarian investor and buy assets at more attractive prices.

“The last two-and-a-half years were tough. We bought things, but there was lots of money around with lots of sponsors and everyone could borrow money. Therefore, there was no way to differentiate yourself.

“Today, that’s different. Credit is harder to come by. Banks are only lending to some people. Capital markets are differentiating between good sponsors and ones that aren’t good sponsors or aren’t seasoned sponsors. So, this now is the time which favours us. We will find better deals now.”

Indeed, Flatt believes Brookfield’s position heading into a difficult environment will be helped by what he sees as a contrarian approach during the boom.

“When everyone else wanted to put their money into growth businesses at 200 times revenue, we were buying insurance assets at book value, or less than book.”

James Thomson is senior Chanticleer columnist based in Melbourne. He was the Companies editor and editor of BRW Magazine. Connect with James on Twitter. Email James at j.thomson@afr.com