Bruce Flatt claims he's not an expert at anything, but he has demonstrated an uncanny knack for knowing which way the wind will blow.
For the past few years the landscape in which the chief executive officer of Brookfield Asset Management Inc. operates has been too smooth and too crowded for the sort of sophisticated, countercyclical tactics at which the company excels: Restructuring troubled or bargain assets.
Now that the credit crisis has thrown the financial world into turmoil, however, Mr. Flatt senses it's a perfect time for Brookfield to put its corporate strategy - and a war chest of nearly $4-billion (U.S.) - to work.
"If you look back at most of our great acquisitions over time … most of them were done in restructuring times," he says. "The three-year period prior to 18 months ago was an odd period for us. It was very difficult for us to operate. Many people were showing up with lots of money. We didn't know how to compete with them so often we just didn't."
Learning From The 1990s
Mr. Flatt cut his teeth in the business of buying and managing companies during the early 1990s, on the cusp of an economic recession.
During that era of overbuilding, credit markets for commercial real estate seized up and the sector - one of Brookfield's core holdings - collapsed. Brookfield, which now controls $90-billion (U.S.) in assets, endured a difficult period, and Mr. Flatt learned a great deal from it.
"Real estate then was far, far worse that it is today. Therefore, one of the few industry [groups]that has seen tougher times in the liquidity market than today are real estate people. It allows us to react quicker when we see these things … to know that things do come back - because it was pretty bleak for real estate at that time - and to continue to look on the positive side of things," Mr. Flatt said.
The cycle has also played out for Brookfield in other sectors, with one standout being a $1-billion hydro projects purchase in upstate New York in 2001, following the collapse of Enron Corp. At that time, the financing market for energy companies dried up, and previous owner Reliant Energy Inc. was forced to sell even though the plants were in good shape.
Deep History In Deep Value
Back in the 1980s, Brookfield was called Brascan Corp., and it was a sprawling enterprise with holdings in real estate, power, mining, brewing, forest products and insurance.
In the turmoil of the 1990s, many of those companies were sold off. Brookfield's transformation continued as the firm pulled away from cyclical business such as commodities. For much of the past decade it has further refined its focus, becoming an asset manager concentrating on power, property and infrastructure.
But the essential spirit of Brascan remains, the ability to uncover valuable assets at good prices because they must be restructured either operationally or financially. With its sharpened focus and financial discipline, Brookfield has been able to seek out ever-better opportunities in tough economic times.
In the past few years, the wall of money pouring into the markets from easy credit and highly leveraged private equity caused both competition and asset prices to soar. This meant a company used to being in the centre of the action often found itself on the sidelines.
A Pile Of Cash
Opportunities to buy more assets, good companies or parts of companies that have been financially mispriced are expected to re-emerge over the next few years, Mr. Flatt said.
"While we're not sure that we've seen the bottom, we believe that investments made over the next 24 to 36 months will be outstanding investments in the fullness of time … The liquidity situation in the marketplace is creating opportunities that are substantial. Today, based on past practice, our team should be able to thrive."
Mr. Flatt and his team have prepared for the economic hurricane with a fortified balance sheet and a pile of cold, hard cash.
About eighteen months ago, in anticipation of the downturn, Brookfield started to raise more cash than usual. It didn't commit to any significant risks, and sold non-core assets, Mr. Flatt said.
At the end of the year, for example, Brookfield had cash and undrawn credit capacity of $3.8-billion, compared with its normal range of $2-billion to $2.5-billion.
The company's ratio of debt to market capitalization is 14 per cent. That rises to 43 per cent when its proportional share of debt of subsidiaries and affiliates, including a 50-per-cent stake in Brookfield Properties Corp., are taken into account. Brookfield has traditionally had a conservative level of debt, maintaining investment-grade status. Increasing discomfort at financial trends caused it to further trim its debt in the past little while.
Lots Of Competition
These days, Mr. Flatt worries more about being left on the outside than about taking on risk.
"We worry we won't be able to capitalize on the opportunities and pick the right one as it goes by. If we don't come out of this time having done something to meaningfully grow the business and expand the franchise, I think we'll look back in five years and say we missed a great period of time," he said.
Strong existing relationships with lenders and financial partners, including big banks and pension funds, will be critical in the months ahead, he said.
The pension funds, however, could also be competitors for some assets. Big funds, including the Canada Pension Plan Investment Board and Ontario Municipal Employees Retirement System, are sitting on cash hoards they are waiting to deploy. They are attracted to many of the same assets as Brookfield, good companies with stable, long-term cash flow and high competitive barriers to entry.
The strength and relative health of Canadian institutions and investors mean they also have a chance to become stronger players internationally, Mr. Flatt said.
"For Canadians, I would say we have an unprecedented opportunity to increase the brand of Canada in the world at large. Our financial institutions, financial system and companies are in excellent shape comparatively. When we visit institutions around the world carrying a Canadian flag, it has been a huge benefit, today even more so because they know what good shape we're in," he said.