Hello everyone and welcome to At Barrens. I'm Andy Serwart and welcome to our guest Bruce Flatt, CEO of Brookfield Corporation and Howard Marks, co-chairman of Oaktree Capital Management. Bruce, Howard, nice to see you. Thank you so much for joining us.
So Brookfield is the big alternative investment company. Oaktree is also an investment company which is specialized in distressed debt. We're talking to both of you because Brookfield now owns Oaktree. Bruce, why don't I start with you? You bought a big piece of Oaktree in 2019 and more recently now you've bought the entire company. Why did you buy it in the first place, the piece? And why did you buy the whole thing now?
Thanks for having us, Andy. We're in the business of providing backbone infrastructure around the world. What that really means is we build, own, operate, and lend to the largest groups of infrastructure on the planet. Think railways, pipelines, data centers, AI factories, transmission lines, and renewable power. Seven years ago, we had equity strategies in all these and small funds where we could provide lending. We looked around the world and said if we were going to achieve excellence for our clients, we needed to have the best in credit, and it was going to take us a long time to get there. We approached Howard to bolt Oaktree underneath Brookfield, and he agreed to do that. We did it in a special way: it took us seven years to slowly assimilate what we wanted and leave our investment teams decentralized. We're now bringing the whole thing together, and our clients will be advantaged by having it together. We've had seven years to test everything out, and everything's now running very effectively. Now we have credit in scale that we can provide to our clients, and that's really the reason for doing it. It's been a great success.
Howard, let me turn to you and ask you a similar question. Why did you sell and how's it going? How's the partnership going?
The partnership is going extremely well. It has been marked by mutual respect, cooperation, helpfulness. Bruce used the term decentralized. Brookfield is not a control freak and has not inserted itself in our investment process, which to us and our clients was the most important thing. Brookfield has given us additional resources that help us do a better job. In particular, we were attracted to Brookfield's nature as not just a third-party investment manager but also as a proprietary owner of assets for its own interests, a capital-rich company. With Brookfield's contribution, we have been able to put more capital into our own strategies, which strengthens the alignment of interest between us and our clients and redounds to their benefit.
Sounds like you're going to keep the brand name Oaktree.
Okay. So, you guys are two very well-known, prominent, successful investors. How much do you talk to each other? Do you work together and discuss ideas or is it just management? First of you, Howard.
I joined the Brookfield board at the beginning of this process, just over six years ago, so I've been involved in that way since then. I give Bruce my ideas and vice versa. We don't have an in-the-weeds working relationship. Other people share ideas at the senior level just below us and have more of a day-to-day relationship.
What about you? What do you think?
With a trillion three of things around the world...
That would be investments or assets or dollars?
Total assets. He nor I make any real decisions. What's extremely important, what Howard has been helpful with, is we care about the culture of the organization and how we're investing, the ethos of how we invest and what we do as an organization. How much you should invest during periods of time, should you be heavy up or slowing down? Those are important, and Howard and I spend a lot of time talking about those types of things, which are extremely important from an overall perspective of an organization. Investments aren't about getting rich overnight; they're about compounding wealth over very long periods of time. One of the benefits we got by bringing Howard in is to help us continue to be among the best in the world in understanding global capital markets and where flows go, because it's really important to what we do.
Has he sprung any aphorisms on you during meetings?
So I want to ask you a little bit about Brookfield stock, which has been very successful over a long period of time, and in particular the last two years, Bruce, where you have a market capitalization of around 100 billion and you've outperformed the peers, which is to say the likes of Blackstone and KKR and Apollo. Why is that?
The markets are the markets. We have a large balance sheet. With our insurance assets and our own balance sheet, we have about $400 billion of assets on a deconsolidated basis in Brookfield Corporation. 160 billion of that is equity capital, and we invest that beside our clients. So we have both a fee business in Brookfield Asset Management, which is separately listed and we own 73% of, but a very large balance sheet at the top. During periods when people are worried about markets or alternative managers, our businesses, because of the durability of the streams of cash flow we have, have probably been seen as a much safer investment than others similar to us. While we have private credit, it's mostly opportunistic. Our biggest business is infrastructure, and these are very long-duration assets. Over the shorter term, over 30 years we've compounded almost 19% annualized. The business, because of scale, operating capabilities, and our size with institutional clients, has been getting easier because there's less competition in what we do given the scale of our operations.
Howard, I want to ask you a little bit about the equity markets, which is not necessarily your bailiwick, but I know you like to weigh in. Given the fact that stocks are at record highs, we're looking at these three big IPOs, SpaceX, Anthropic, and OpenAI coming with these huge valuations. What's your take on the stock market right now?
Andy, to me, if you want to gauge the conditions in the stock market and use that to infer what the future holds—not next month or next week, but the next two to four years, the intermediate term—I think the most important single indicator is to understand whether the market is currently being driven by optimism or pessimism. Everything else being equal, when it's driven by optimism, you get higher prices relative to intrinsic value, which implies lower returns relative to the average. I think there's no arguing that for the most part, since October 1st of 2022—a special date because that's when the Fed turned more dovish—optimism has been in the ascendancy. Optimism is what permits things like the IPOs we're looking at. You can't have that in a pessimistic environment. The stock market has well more than doubled over that period, the S&P 500. So you have to recognize the ascendancy of optimism and behave accordingly. Part of that means with everything you do, some part of your body has to be saying, 'Yes, but how do we prepare for less optimistic times?'
All right. I want to ask you about the credit markets then. Where do you think we are in the cycle with credit markets? And what do you think Kevin Warsh is going to do? And what should Kevin Warsh do? And Bruce, by the way, I'm going to ask you the same two questions about equity and debt. Be prepared.
