Business Focus:

Brookfield Asset Management (BAM): BAM operates as one of the largest asset managers in North America. BAM’s flagship franchise – Brookfield Asset Management, has consistently grown its asset under management (AUM) by double-digit organically over the last decade due to a transition of allocators from public market investing to alternative private investing. BAM is one of the leaders in the niche of real estate investing. The company is expected to pay out the majority of its distributable earnings as dividends while continuing to grow earnings by double-digits. BAM’s management believes they can double the AUM over the next five years, which would make BAM a pretty attractive dividend growth name from the current levels.

Blackstone (BX): BX is also one of the largest alternative asset managers globally. The company is one of the first asset managers that currently manages more than $1 trillion in AUM. BX has been a “growth” cash cow for many years, consistently raising dividends and buying back shares while at the same time growing its AUM by double digits on average. BX has recently come out of a trough in earning growth due to the headwind from rising interest rates. Given the capital-light nature of the asset management business, we think BX is a high-quality dividend growth with significant potential for capital appreciation along with an attractive dividend yield.

Financial Performance:

In terms of valuation, both companies have consistently traded at premium valuations relative to the market and other asset managers in general. Given the track record of consistent double-digit growth in AUM without any significant acquisitions, which indicates the valuable brand name of both companies in the asset management industry, and the market tends to value these companies with high valuation multiples. Unlike other companies in the industry that retained their earnings and compound capital for shareholders, the two companies decided to build their investment cases as capital-light, dividend growth names by choosing to pay out the majority of their earnings as dividends. Both companies are well-positioned to do well over the next few years due to the favourable environment of a declining interest rate backdrop. BAM is trading at a higher multiple than BX, but we think the premium valuation made sense given its strong organic growth profile.

Financial Metrics and Forward Estimates:

The table below compares the financial metrics and stats between BAM and BX. BX is much larger in size relative to BAM, BAM’s AUM growth going forward is stronger due to the lower base of AUM. Both companies are forecasted to grow strongly over the next few years, coming out of the downturn recently. BAM’s growth is projected to be higher for longer, thus justifying the slight premium valuation.

Investment Outlook:

Both BX and BAM are solid operators in the asset management industry. BX has managed to reward shareholders handsomely over the years, while BAM just recently went public (being spun out of BN a few years ago). That being said, the two companies’ investment thesis is quite similar.

Both could do well from these levels, given that both companies are projected to double their AUM over the next five to seven years. The economics of both companies are quite favourable due to the royalty-like business models that collect fees as a certain percentage of AUM.

Comparing BX and BAM can be summarized by whether an investor places more importance on organic growth or a slightly cheaper valuation. BAM is more expensive than BX due to a stronger fundamental profile. That said, growth for both companies will be dependent on other macro factors, including the movement of interest rates and the continuous transition from public investing to the private investing industry over the next few years, we are a big fan of both companies and would be comfortable holding both for the long term.

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Employees, directors, officers, related companies, the i2i Fund and/or partners of 5i Research do not have a financial or other interest in BAM and BX at the time of publishing.