Bruce Flatt and Howard Marks sit down with Barron's

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.

Great to be here.

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?

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.

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?

Daily.

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?

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?

Should we raise rates?

Okay. Let's go back, I guess, to equities then. What do you make of the stock market, Bruce, given what we're seeing right now with all this excitement?

So, our business is not about investing in the stock market. It's about making private investments in things that could be in the stock market or can be purchased in the stock market. And what's happening is there is a bifurcated market out there. If companies are technology related, and these big IPOs are the antithesis of it, but those things are going on. That is one multiple, but there's a lot of other companies that are out there trading at multiples that are low, and we've been taking many companies private. And what I'm quite confident about is that all the investments we've made in the past 24 to 36 months, and for the next 24 to 36 months, will be excellent investments in the fullness of time, and will earn their return on capital as long as we run them properly, and drive the businesses and operate them well. And so we're able to buy things in the private markets, some of them from the stock markets, because multiples are low on these cash-flowing businesses that people have forgotten about. So I would just caveat to say that overall markets are one thing if you're an index investor, but when you are skilled enough to just own businesses, there are some exceptional opportunities still out there in the markets. And the only second thing I'd say is what's going on, and we see it from our power business. We see it from our data center business. We see it from our artificial intelligence factory business. We see it across the board. What's going on with the investment being put into productivity advances because really what all this compute is is productivity advances for business whether it's in factories or in offices or in houses or in other people. Those advances, if this investment works we will drive one of the most productive operating periods in the history of the world and so I think that's why stock markets are high and it's not to say that they can't go lower and they will go lower at some point that's called markets, but the underlying fundamentals and the earnings power being created by some businesses is very significant today.

And you're not concerned about a bubble in this sort of AI-driven economy in terms of electrification? This is a period where you do play heavily electrification data centers etc. as you mentioned. I mean are prices getting too high there?

So here's what I'm going to tell you. If the expectation is that we're going to build this much, the reality is and we're the largest private builder of power in the world, we're one if not the largest builder of data centers in the world. The expectation of what people need is here and what we're building is here. It is dramatically because this is hard to do. You have to site the power, you have to connect it to the plant or the grid, you need to build the facility, you need to put chips inside of it and you have to have between 20 and 250 billion dollars. This is not easy and it's hard work and so it's hard to do therefore the amount that's coming is dramatically less than what people think. And what we're doing is we're leasing to the best countries in the world for sovereign AI. And we're leasing to the best companies in the world. Frankly, some of them are rated better than countries. And so their expectation is that we're getting 25-year contracts from them. Their expectation is that they will be able to utilize that more productively and earn high returns on capital. And that's what is to be seen. But these are the most successful companies in the world. And if anyone you would bet that they can do it, it's them.

Howard, there's been a lot of talk about problems in the software business impacting private credit. Are you starting to see a spike or do you anticipate one in distressed debt in this area or in any area at this time?

Right. Shifting gears a little bit back to you, Bruce. You're Canadian, Brookfield is a Canadian company, and I'm wondering what your take on US-Canada relations is at this particular point. Mark Carney, of course, Prime Minister of Canada used to work at Brookfield.

So, we have 600 billion dollars of investments in the United States. I think that would rank us maybe as the largest private investor in the United States. If not, it's in the top five. So, we are a local investor in every country we go to. And why that's important to say that is what we do and it kind of gets back to what we do. We invest in a country and we provide services to companies or individuals. We provide the road to them. We provide the water to them. We provide the power to them. We provide the data center to them. Compute to them. And so, we're a local investor and we do that to local people. So, we do that in Canada. We do that in the United States. We do that in Australia. We do that in France. We do that in South Korea. We do it all over the world in the places where we've chosen in 40 places. What's really important is we go to good countries which have good rule of law and have the wind behind their back for economic development and that you can earn a return in that country. So, that's what's really important. Whether we started in Canada or not, 90% of our things are outside of Canada. Canada is still a great place to invest and we put enormous money and we probably have an advantage in investing in Canada because of our cultural roots. But whether Canada, US, France, UK, Italy have a trade agreement or do things together don't really... actually we have no view because we're a local investor in each single country and we don't really have a view on what matters for trade.

All right, I guess I'll let you get away with that but then you have to tell me how you think Mark Carney's doing.

So, he was with us almost 5 years. He's an excellent executive from what I've observed since he's been in power. He's doing a fantastic job and if Canada has a chance in dealing with their issues, he's an excellent person to put in the job.

Some people, Bruce, have criticized Brookfield for being too complicated. How would you respond to that?

Yeah, look I would just say we firstly from time to time we always try to slim down and uncomplicate things but it's a multi-diverse business where we've tried to optimize the capital markets and take care of investors in a way where we care about their taxes or we care about their duration of investing and different things. So, sometimes that brings... it takes more time-consuming to understand the structures that we have to invest into and from time to time we get that criticism but what I can tell you is most investors that know us and have invested with us have had an extremely good experience because we've earned them very good returns. We're very transparent with our governance. They know what we do and they know how we do it, and we're very open and communicative with them. So, we just maybe take a little more time to think about it.

Howard, have you been surprised at how the public and private markets have evolved? I guess in particular private markets, and I guess when I'm saying both of them, I mean sort of in conjunction. Has this evolution surprised you?

I'm going to ask a final question to both of you, and that is, and I'll start with you then, Bruce, which is what is something that investors are missing about the markets that will inform their thinking about the future? If that's something you can wrap your brain around.

I think the most important thing that investors always have to focus on, but in particular, it's in times like this, is that earning returns is about compounding wealth over very, very long periods of time. And what you need to do is buy into great businesses with great people who can steward your capital and run the business as well. And if you do that, the miracle of compound wealth is incredible. Mr. Buffett showed us that over the last 50 years, and it's no accident that he's extremely successful because of it. The compounding of returns over time is an amazing thing, and it often gets forgotten about at points in time where the stock markets go higher, they go low. And we should always keep that very focused in our mind at all times.

Howard, what about you?

Howard Marks and Bruce Flatt, thank you both so much for joining us.

This is at Barron's. I'm Andy Serwer. We'll catch you next time.