Hello everyone and welcome to Ed Barron's. I'm Andy Serwer 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 an also 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. I'd just say we're in the business of providing backbone infrastructure around the world. And what that really means is we build, own, operate, and lend to the largest groups of infrastructure on the planet. So, think railways, pipelines, data centers, AI factories, transmission lines, and renewable power, and all of those backbone infrastructure. And 7 years ago, we had equity strategies in all these and small funds where we could provide lending. And we looked around the world and said if we were going to get there and achieve excellence for our clients, what we needed to do was to have the best in credit. And it was going to take us a long time to get there and we approached Howard to bolt Oaktree underneath Brookfield and he agreed to do that, but we did it in a very special way, which was it took us 7 years to slowly assimilate what we wanted to assimilate and leave our investment teams decentralized down below. And we're now bringing the whole thing together and there are a few things our clients will be advantaged by having together, but largely we've had 7 years to test everything out and everything's now running very effectively and now we have credit in scale that we can provide to our clients and that's really the reason for doing it and it's been a great success.
All right, Howard, let me turn to you and ask you sort of a similar question, but why did you sell and how's it going? How's the partnership going?
Well, the partnership is going extremely well. It has been marked by mutual respect, cooperation, helpfulness, but Bruce used the term decentralized. The Brookfield is not a control freak and in particular has not inserted itself in our investment process, which to us and to our clients was the most important thing. But Brookfield has given us additional resources that help us do a better job and 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 and thus a capital-rich company. With Brookfield's contribution in particular we have been able to put more capital into our own strategies, which I think 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 you, Howard.
Well, I joined the Brookfield board at the beginning of this process and that was just over six years ago. And so I've been involved in that way since then and 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?
I would say with a trillion three of things around the world...
Will be investments or assets worth dollars.
Total assets. Okay. He nor I make any real decisions. What's extremely important what Howard has been helpful with is we need to understand there are a few things we care about. A 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 heavying up or slowing down? Those are important and I think that Howard and I spend a lot of time talking about those type of things which are extremely important from an overall perspective of an organization, because investments aren't about getting rich overnight. They're about compounding wealth over very long periods of time and I think one of the benefits we got by bringing Howard in is to help us continue 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. In particular, the last 2 years, Bruce, so you have a market capitalization of around 100 billion, and you've outperformed the peers, which is to say the likes of Blackstone, KKR, Apollo. Why is that?
So, you look at the markets are the markets, but we have a large balance sheet. We have with our insurance assets and our own balance sheet about 400 billion dollars 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, that we own 73% of, but a very large balance sheet at the top. So, during periods of time when people are worried about markets, or worried about alternative managers, our businesses, just because of the durability of the streams of cash flow we have, probably have been seen as a much safer investment than others similar to us. Because while we have private credit, it's mostly opportunistic. Our biggest business is infrastructure. And these are very long duration assets. So, that's over the shorter term. I would say, over 30 years, we've compounded almost 19% annualized. And I'd say the business has, because of scale, because of operating capabilities, and because of our size with institutional clients, it has been getting... nothing's ever easier, but I think it's easier because there's less competition in what we do, just given the scale of our business.
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 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 as an to infer what the future holds, and I'm not talking about the future next month or next week, I'm talking about the next two to four years, let's say, 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. And I think there's no arguing that for the most part, I'll say since October the 1st of '22, which is a special date for a reason, it's when the Fed turned more dovish. In that period, which is now coming up to three and three-quarter years, 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. So I think you have to recognize the ascendancy of optimism, and you have to behave accordingly. And 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 the 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, so be prepared. Okay?
Well, the credit markets have been on a tear for the most part of the last 17 years. You know, we came out of the global financial crisis the stock market hit a low in March of '09. That was the low water mark for everything, stocks, credit, optimism, everything. And we've pretty much had uninterrupted progress since. Oh yes, there was this thing called the pandemic, but that was easily solved, and it's certainly in the rearview mirror today. We had a bout with inflation, and we had to hike interest rates, but things have gone quite well. The economy has performed very well. We had the longest recovery in history, and a slight setback, but again, performing very well, and I think our economy is the envy of the world. So you take this all together with rising optimism, and you get a market in which it's easy to borrow. The credit market is generous. And when the totality of conditions that I described takes place, fear recedes, skepticism declines, to some extent, due diligence declines, and willingness, eagerness takes over along with FOMO. If I don't cut the price of this loan, my competitor will make the loan, and I'll have to look on. So, these are what happens. I think the credit cycle has been very strong. It's gone on with the interruption of the pandemic, probably the longest time in history. And so, conditions in credit are generous, and borrowing is easy. And we have to bear that in mind, and we have to try to uphold high standards on behalf of our clients.
