Description

BBU is cheap and likely a decent long from here. The idea is simple and complex at the same time - it really depends on how deep one wants to go with it. I will keep it simple here because more isn’t really required in my opinion, but I’ll try to avoid oversimplifying it. 

The thesis is the following: 

Buying a stake in BBU is like investing in a successful PE fund at a ~23% discount on its invested capital. Sounds not good enough? Ok, here comes the good part: Since the capital wasn’t just all deployed yesterday, but instead invested over the last several years, there are very likely more embedded gains than losses in their book. So the real discount is likely a lot larger than ~23%. BBU itself doesn’t adjust their valuations up or down though, it's always invested capital until realisation. So it's the market's job to figure it out and it currently seems to be quite off. The real discount probably stands at/or over 50% at the moment. At least that's my opinion and my job here is to try to make that apparent.

In addition to the discount, one gets a performance fee waiver on the first ~60% of gains from here. Which is a nice cherry since nobody (besides all our beloved clients of course) likes to pay performance fees. The management fee is 1.25% charged on market-cap + Holdco debt (they are not stupid, right?). Of course, here on VIC, we all hate management fees too. That said, at least that way corporate overhead costs are clearly defined and there are no material other corporate costs besides Holdco interest, if and when they choose to use debt. 

The track record of the people running the “PE fund” is good with most of the currently invested capital stemming from realised gains of past investments. Lastly, the earnings quality of their underlying investments has been improving over the last several years. Earnings from the current portfolio are a lot less cyclical and more growthy than a few years ago. However, the look-through EV/EBITDA multiple currently stands at only 7.6x including Holdco costs. 

The discount has widened over the last two years - basically since interest rates have gone up (the discount reached the high point last fall). The higher interest rates have been a headwind to BBUs underlying cashflows but by no means on a level that the business can’t overcome. For someone with a longer-term view, the current situation offers a buying opportunity that I am going to discuss now. 

First, let's define the unadjusted discount on invested capital of ~23%

Today BBU has 8bn in capital deployed across ~25 equity investments, most of which were bought between 2017 and 2023. The businesses are generally not majority-owned by BBU but in almost all cases, BBU holds effective control due to additional co-ownership from other Brookfield-related parties. BBU currently has around 2.5bn in debt (1.78bn USD in hold-co net debt and 0.74bn preferred debt held by Brookfield Corp) that needs to be subtracted from the 8bn USD invested capital to arrive at the equity value of BBU shares/units. So there is 5.5bn USD in value vs. a market cap for the units of 4.25bn USD based on 217mn of units/shares outstanding and a unit price of 19.6 USD. 

The list below is an overview of their current investments and the allocated capital to each name since their spin-off in 2016. For obvious reasons, the investments that they have exited are not on the list any more. For less obvious reasons, they also exclude their ownership stakes that BBU already held at a spin-off from Brookfield. Before discussing the investments in more detail, let us quickly look at the past track record. 

Second, let's look at the track record of this public PE fund

Here are BBU's own words on their historical track record plus some KPIs that go with it:

Since creating Brookfield Business Partners, we have now monetized 20 businesses and generated approximately $6 billion of proceeds at our share, realizing a 3x multiple on our investment and a composite IRR of approximately 30%.

The realised aggregated IRR and MoC numbers aren’t verifiable for us outsiders but we can get some idea by piecing together information on realised individual investment results/commentary over the years. 

Given that some of BBUs past home runs were on the larger side, their performance claims seem believable. The two larger home runs have been Graftech - acquired in 2015, IPOed in 2018, and sold down over time since then and Westinghouse - acquired in 2018 and sold in one swoop in 2022, with a close last year. They have made ~6x their money in both cases on ~0.3bn of capital in Graftech and on ~0.4bn of capital in  Westinghouse. Together those two investments already account for more than half of their 6bn USD in realised proceeds, with IRRs and MoC well above the stated aggregates. 

There have been smaller winners, like Quadrant at ~3x in three and half years, North American Palladium at ~3.3x in five years or more recently a partial sale of Everise at 3.5x in two and half years. There are of course also less outstanding results and the occasional loss. However, the overall track on realised investments looks pretty good. More importantly for us now, they are also sitting on large unrealised gains which is the crux of the thesis here.

Let's get to work on the true discount/upside on BBU

The basis for that work is their portfolio list (shown above) of roughly 8bn USD in capital invested. The first thing I want to do is to complete the ownership stakes with the companies that aren’t on the list, which are all the companies that BBU held before the spin.    

The companies not on the list are likely worth around 0.6bn USD

The names are Multiplex - 100% owned by BBU, private Ember Resources - 46% owned, public Bridgemarq RE Services - 42% of shares owned and public Precision Drilling 0,4mn shares owned (due to recent CWC Energy sale). Other small stakes have been recently sold. The Canadian aggregates business Hammerstone was also just sold post Q1 24, with cash proceeds of 135 million set to arrive for BBU in Q3 this year. Bridgemarq, Precision Drilling and Ember’s values add up to 150 million USD, maybe more depending on Ember's value, but I don't think a lot less. 

Multiplex is a little larger. It is a global construction business founded in Australia in 1962. It has since delivered over 1,000 projects with a combined value in excess of 100bn USD. Half or more of the skyline in Australia (at least that's what it looks like) was probably designed by Multiplex. The business does no construction work in-house, thereby limiting risk, reward and capital involved plus it also creates more earnings stability. That said, Multiplex is not completely immune to cost overruns. Over the last 10 years ending with 2022 (I haven't found 2023 results in any corner of BBUs disclosures), the business has averaged around 4bn USD in gross revenues, 80mn USD in EBITDA (at a 2% Margin) and 60mn USD in FFO/earnings. The company had net cash of 200mn USD in 2021, the last time BBU disclosed it. The business is always run with net cash (around that number). So likely not much of it, is really excess cash… At least it should work as a valuation floor, since they have never lost a noteworthy amount of money (there was a single loss of 6mn in 2020) and closing up shop shouldn’t be too costly, given that there is no in-house construction. The Backlog averaged around 6.6bn USD over the last 10 years and stood at 6.2bn at year-end 2023, so results over the next few years should likely look like the last few years, maybe better because the construction world might become a little more predictable again. Let's just say the business is worth 350mn (5-6x 10Y avg. earnings) and together with the three other companies at a combined value of 150mn USD, plus Hammerstone at 135mn USD there is over 0.6bn USD in total value that is not included in the list of 8bn of capital invested since spin. I think that value is reasonably conservative for the companies not on the list. Now let's look at the list itself.

BBUs Clarios stake (28% owned) is likely worth ~3bn USD or more vs. 820mn USD invested 

The biggest mark-to-market adjustment required is likely for their 28% ownership stake in Clarios. This one seems to be their next home run after Westinghouse and Graftech. Clarios is the global leader in low-voltage battery systems selling 150mn batteries annually. One in three auto batteries in the world is a Clarios battery (they have multiple brands) and they are 5-6x larger than their next closest competitor. BBU bought the business from Johnson Controls in 2019 for 13.2bn USD. They paid 8.25x EV/EBITDA for it and financed the purchase with 3bn in equity (BBU took a 28% stake) and 10.2bn USD in debt. Leverage came close to 6.5x at close based on 1.6bn in EBITDA at the time. EV/FCFF was slightly below 12x.

Clarios is a decent business and in hindsight, the purchase price was too low. 80% of their revenue comes from aftermarket battery replacements that are very stable and more profitable than the more cyclical OEM sales. The company has a good and long history of high single-digit growth. This is what BBU said at the time of the acquisition: 

This company has a remarkable track record of increasing market share, margins and cash flows. In fact, in all but one of the last fifteen years the business has consistently increased EBITDA. During the global financial crisis, new auto sales plummeted in 2009 while aftermarket battery sales remained steady, and Power Solutions resumed its EBITDA growth trajectory the following year. While Power Solutions is a high-quality business, we have identified opportunities to further enhance value at the company. 

We can verify that claim because Johnson Controls reported the financials for the business starting in 2002. The Chart below shows Clarios total EBITDA since then up until today (H1 2024, because FY ends Sept). Return on Assets (Not a perfect return KPI, but something we can measure with Johnson's disclosure) averaged 15% and has on average gone up a few percentage points over time until the end of disclosure in 2018. EBITDA-Capex cash conversion averaged close to 70% till 2018. So not too shabby.

The business is currently benefiting from a trend towards AGM or advanced batteries, which are more complex and a lot more prevalent in modern cars than the conventional 12V batteries. I believe they also have a higher market share with advanced batteries, more like 50% compared to 33% overall. According to Clarios/BBU advanced battery sales are importantly 2x as profitable for them vs conventional batteries. Given the OEM/aftermarket dynamics, it is a trend the company should benefit from for years to come. OEM advanced mix is already at close to 70% vs. aftermarket at 17%, both values growing nicely over time and overall Clarios is at 28%. The business is also involved in 150 different new BEVs. EVs still need low-voltage batteries in addition to their main battery. The company describes it as another positive trend, but maybe the profitability is lower with low-voltage solutions for EVs, I haven’t gone that deep.  

Given the relatively strong cash generation of the business plus an EBITDA level of 2.1bn USD this year vs 1.6bn USD when BBU bought the company in 2019, leverage is down to 3.7x TTM. Net Debt has also decreased quite a bit in absolute levels, it stands at 7.8bn USD now vs. 10.2bn USD at the close in 2019. The years since 2019 (with the pandemic and more recent inflation spike) haven’t exactly been the easiest years for industrials, which underpins the quality of this business. BBU will likely start to monetise this asset in some shape or form in the next 12 months. The options range from a dividend recap, partial sale to a private to an IPO, depending on the market conditions. With all the more recent EV platform wins, plus the advanced battery story, they can likely bring it to the public markets. Based on the current story, the multiple could go quite a bit higher than the lowish 8.25x BBU bought it for. That said, even at that acquisition multiple BBUs stake in the business is worth close to 3bn USD today vs. the 0.82bn in the books. I wouldn’t be surprised if they realise 4bn at 10x EV/EBITDA for their 28% stake which would be a 7% EV/FCFF yield. For more info, here is a link to the last Investor deck from Clarios. BBU also provides additional info in letters and calls.

Given BBUs total market cap of ~4.25bn USD. A value realisation of Clarios, especially via a successful IPO should be a nice catalyst for BBU.

Next up, CDK Global (26% stake) in the books at 0.725bn is likely worth 2.5x that. 

BBU bought the US car dealership software business at ~14 EV/EBITDA vs. 10-year average public trading multiple of 15x in 2022 (link). At the time of BBUs purchase, CDK had compressed margins and the stock was weak. Since the acquisition, EBITDA Margins have improved, most recently to 47% vs. low 30% at the time of the acquisition.      

EBITDA is now up around 40%. Slapping the same 14x EV/EBITDA on it today would yield 1.9bn USD in value for BBUs stake. We could haircut the multiple some and it would still be 2x their invested capital. The business is also highly cash-generative and it should deleverage relatively quickly from here if they choose to do so. For now, absolut debt is only slightly down. They sound quite optimistic regarding further operational improvements.  From the recent conference call:

We've talked about CDK. We bought that business in 2022. We identified an opportunity to improve margins by 1,000 basis points, and we've executed on that. And our plan was to do that over a three-year period, and we've executed on all of that in about 18 months. So, as you said, well ahead of plan. The business is performing very well. We've sold non-core part of the business last year at a very strong multiple, and we've carved out another part of the business, which services the light vehicle, recreational vehicle industry and that business is being run on a standalone basis and will be a huge value creation lever for us, in addition to the core business.

So, there are additional levers within the business. On the auto dealer side, there's a lot of focus today on upgrading the technology stack in the business. The team recently rolled out some AI capability. Anuj touched on this earlier. So, we continue to enhance the product and the business continues to perform exceptionally well. But we do want to make sure that we've completed that technology enhancement as we kind of pivot towards monetizing. And, as you well know, everything's on sale for the right price. So, we will be looking at all options at the right time.

Anuj Ranjan: Yeah. I think that was great. Thanks, Jaspreet. I'll just add. Look, in addition to enhancing EBITDA margins, which hit 47% this quarter from 33% at acquisition, as Jaspreet said, the business is also growing on a top line basis quite well with recurring revenues up significantly and continuing to grow as we've focused the business on more profitable revenue streams. And so, I would just say that we're still in the early stages of this business. There's a lot of growth and a lot of opportunity left. And again, we're in no rush.

If the CDK continues to improve from here as BBU thinks, they would have another home run on their hands.

Sagen (41% ownership) with 0.85bn in the books is likely worth around 1.5x that amount. 

Sagen is also a decent business. It is Canada's largest private mortgage insurance provider. It has generated around 20% ROEs since BBU took over the company in late 2019 up from 12% before the acquisition. The purchase price equals book value of around 2bn USD. The distributions since the acquisition have already reached 70% of their capital deployed. The business has historically produced quite stable but slowly growing earnings over time, pretty much regardless of the economic environment.

The Canadian credit insurance market is a lot better than the one in the US, with the infamous results we all know about. To me, the important difference/improvements come down to lender recourse, mandatory insurance requirement for down payments below 20%, and a full upfront vs. monthly premiums. The Canadian banking space is also more concentrated with historically better lending standards. Anyway, I will let the CEO of Sagen explain it a bit further:

The Canadian mortgage insurance market is one of the best in the world. We have three disciplined providers and a conservative lending environment based on industry underwriting practices and strict regulations from OSFI, our federal supervisor. The legislation provides for lender recourse, which basically means that borrowers are liable for their debt even if they turn their home back to the lender. So Canadians don't typically walk away if their home prices fall below their mortgage amount. We receive our premiums upfront, as I noted, and we invested for the duration of the policy. The US market, on the other hand, is quite different. It's heavily competed with numerous providers in a state-regulated environment. There is limited recourse, which meant during the global financial crisis, we saw a tremendous number of homeowners walk away from their debt, so called jingle mail, as some of you recall.

In the US model, it's often a monthly paid premium as well. And what that means is that once that borrower's LTV or loan-to-value drops below 80%, they stop paying. And what that does is it highly concentrates the risk with the remaining portfolio because those are the borrowers who can't seem to get their mortgage paid down as much.

We ensure high quality mortgages with strong borrowers and essentially act as a second set of eyes on high-ratio mortgages. I'm sure borrowers are typically first-time homebuyers purchasing entry-level owner-occupied homes. And that is important because we have no exposure to investors and rental properties. We insure mortgages all over Canada with the majority of them in major urban areas and we benefit from a diverse Canadian economy with rarely more than one or two provinces in a simultaneous economic downturn. Our solid business model has delivered durable earnings and cash flow through a variety of economic cycles, including very stable performance during the global financial crisis. 

I think Sagen should be worth 1.5x book rather than implied ~1x book based on invested capital. The company may be over-earning a bit at the moment, given that loss ratios have been at historic lows since 2021, but likely not by a material amount. Atm 1.5x book provides one with a double-digit earnings yield (20% ROEs since BBUs purchase). Given the past performance of this business, the valuation might even be on the lower end of fair or simply provide a decent margin of safety without a deep dive. If one wants to learn more about Sagen, BBU brought the CEO to their last Investor Day in September 2023. I thought the presentation was quite reassuring regarding the impacts of the current rate hike cycle and housing market dynamics on their business.

 Those four adjustments get us to over 12bn in value, or over 9.5bn net of debt bringing the discount to over 50%. 

I don’t want to go into a lot more detail on all the other individual names here, but my personal opinion is the rest of the portfolio in aggregate also has more upside than downside. Here are just a few words on each:

• Greenergy (18% stake) - acquired in 2017, on the books for 88mn USD. The company has grown quite a bit since then and had interested buyers in 2022 (link) for 1.4bn USD or 250mn USD at BUUs share. BBU is selling the distribution side of the business at the moment. So there will be proceeds soon. It's likely worth a decent amount more than 88mn USD.  

• One Toronto Gaming (14% BBU stake) on the books for 6mn USD since Jan 2018. BBU brought the casino licences to the partnership but committed basically no capital. The company has since paid two dividends. BBUs share in 2021 was 55mn USD and 62mn USD in Q1 2024. I don’t know how much the stake is worth, but certainly seems like a lot more than 6mn USD

• Imagine (36% stake) on the books for 85mn USD, is a smallish rural fiber operator in Ireland with a 4% share of the broadband market. It was founder-led until his recent death. It's an odd investment for them that doesn’t sound too promising (link). It won't move the needle much though, even if it were a total loss. 

• Healthscope (28% stake) acquired in 2019 on the books for 293mn USD. It is the largest private hospital operator in Australia and was a publicly traded company. BBU took it private at EV/EBITDA of 14x (in line with the 10Y trading avg.). Historically, Healthscope was a decent performer. However, since Covid, especially due to the more recent unresolved cost pressures (no adequate government compensation) the company has been underearning. BBU delevered the balance sheet from 1.4bn USD of debt at the time of the acquisition to 785mn USD most recently. The value of capital on the books translates into 10x EV/EBITDA atm, but Healthscope is producing barely any cash atm and EBITDA has become less meaningful because they have also funded the acquisition via a saleback transaction, so they are now paying more rent than historically. BBU still believes in the longer-term story. I can see that the largest privately run hospital group should do ok over the long term, but for now one could haircut the value to be conservative.

• Unidas (35% stake) on the books for 206mn USD. Unidas is the #3 car rental company in Brazil today. BBUs initial investment was a stake in Ouro Verde in 2019 with a follow-on acquisition of Unidas in 2022 to double the size of the company. The acquisition was possible due to the regulatory forced sale of Unidas Brazilian car rental business (the #1 player in Brazil, Localiza acquired Unidas parent) which Brookfield picked up. Value on the book translates into 5x EV/EBITDA (3.5 turns with net debt). I can see this business being worth 2x its value on the books, or maybe more, but I don’t know these kinds of companies well… For a simple comparison, Localiza is trading at over 10x EV/EBITDA, but they are larger and have other operations as well.

• Indostar (20% stake) on the books for 105mn. It is an Indian non-bank financial for commercial vehicle financing. It is still listed in India and trades around book atm which for BBUs stake means 80mn USD. I haven’t spent any real time on it, given that it won’t move the needle much in either direction. 

• Everise (17% stake after a partial sale of 11%) on the books at 61mn USD. It's a healthcare technology service provider. EBITDA more than doubled since their acquisition in 2021, and the partial sale took place at 3.5x invested capital. BBU received 120mn in cash. The remaining stake at that more recent valuation is worth 170mn USD. link  

• La Trobe (35% stake) invested capital of 212mn USD. It is an Australian alternative credit manager focused on residential mortgages. BBU bought the business from Blackrock in 2022. At the time La Trobes AUM stood at 13.5bn, it has since grown 40% to 19bn. At the same valuation, it would be worth 300mn USD.

• Magnati (22% stake) on the books for 68mn USD is a payment processing company in the Middle East, mostly in the UAE. The business is in the process of being merged with Network International, another payment processor in UAE that is currently taken private by Brookfield at a good combined price of 11x EV/EBITDA. BBU's investment share will be 150mn USD in Network International (8% stake) before the Merger. There should be a decent growth and cost synergy opportunity ahead for the combined business. It looks promising, Network International was guiding to longer-term growth at 20% p.a. with an EBITDA margin of 45-50% and capex of 8-10% of revenue and has a good past growth story.  

• Altera - formerly Teekay Offshore (53% stake) at 800mn in overall invested capital. Brookfield put capital to work on both the equity and debt side. The business went south during Covid. In 2021 Brookfield smartly converted their debt position into senior secured from unsecured and a year later they sent the company into a restructuring that wiped out almost a similar amount of unsecured debt as their own equity stake. The senior debt conversion gave them basically a complete equity position again. So they avoided a costly mistake. I am not sure what the business should be worth though. 0.8bn USD equity value represents 8x EV/EBITDA atm, should it be less, or more, I don’t really know on this one. The market for FPSOs has improved quite a bit recently and they have signed two new longer-term contracts that have yet to contribute to results. 

• Brand Safeway (18% stake) invested capital at 460mn USD. It closed right before COVID, so it was a bit unfortunate in terms of timing given the nature of the business as a construction service provider. BBU is not in the lead on this one. The BN consortium bought their 45% stake from Clayton, Dubilier & Rice (they sold half, kept 45%) with the remaining 10% in management's hands. It generally seems to be a decent business, but there is hardly any information from BBU on it. Here is the acquisition link. I personally leave it at that invested capital value. One could also adjust it down a notch, but I am not sure if that is reasonable.

• Nielsen (7% stake on converted basis, BBU currently holds prefs - invested capital 400mn USD). Nielsen was taken private by Elliott in 2022 at an EV of 16bn USD on a depressed EBITDA, at 13x (on par with the 10y public trading average). The pref should put a floor on the 400mn USD. I am not sure how large the cost opportunity is here and how well Nielsen moves into the streaming area. The company seems to stay relevant, but I haven’t put in the work to know the upside here. BBU disclosure is non-existent for now. 

• Modulaire Group (28% stake) invested capital of 460mn USD, bought in late 2021. It is the  European leader in modular container leasing services. Per the company, they are 4x the size of the next largest competitor. The company has an acquisitive history, that has continued under BBUs ownership, with a ~10% bolt-on last year. They also spend some growth capex each year. According to them sustaining capex is around 9-10%. Below are a few KIPs for some perspective, numbers are in EUR. 

The company expects to grow again in 2024 along with some margin expansion. Q1 EBITDA is up high single digits. The value is likely a bit higher by now than the invested capital, but not (yet) materially so. In addition to the acquisitions Modulaire has also paid a dividend to BBU last year. 

• Scientific Games (33% share) at 785mn invested capital, bought in 2022. It is the leading global provider of government lottery services with business in 50 countries across 140 customers. According to them, they are 4x the size of the next largest competitor in instant lottery games. The company looks like a decent business. BBU paid 14 x EV/EBITDA for it and leveraged it at close to 8x. For now, EBITDA is unchanged vs 2022 but BBU sees a 150mn operational improvement opportunity vs. the 420mn in EBITDA plus further growth from newly won online lotteries and other contracts where BBU estimates to get an additional 10% EBITDA uplift, once the contracts are fully ramped. The business seems to be nicely cash-generative and very stable. EBITDA margin averaged 44% in the three years where the previous owner disclosed clean financials (2018-2020) and capex was only 6% of revenue over the decade before the acquisition. BBU bought the business from quite an indebted party, not to say an overindebted seller on a directly negotiated sale if I remember correctly. I think this one also has a good chance to turn out well. 

• BRK Ambiental (26% stake) - 421mn USD invested capital, acquired in 2017. It is one of Brazil's largest water and wastewater service providers with 16 million customers in 100 municipalities across 13 states. EBITDA has grown quite strongly since 2017, from a level of 100mn USD to around 300mn, or 320mn USD in 2023 if we take their adjustments at face value. It seems to be a high-quality infrastructure asset, with further margin potential, especially once more of the individual water/wastewater systems mature. The company is still highly leveraged at 7x or maybe slightly below 6x if we believe in the adjustments. Given the highly predictable cash flows stemming from long-term inflation adj. concessions, the company can handle that kind of debt load. It recently turned FCF positive for the first time, after a heaver investment period due to newly won concessions in 2020. The stake would be worth quite a lot more at the initial EV/EBITDA multiple of 20-22 (I believe), but I don’t know what a fair multiple is. BBU might monetise the asset if they get a decent price, otherwise they will keep growing it.

• Schoeller (14% stake, bought in 2018) invested capital of 79mn USD. It is another inconsequential holding, given that there is no multi-bagger potential based on the past disclosers/comments. The business had cost issues during the recent inflation shock. There might also be more structural cost issues, given it is a European-focused plastic package business and therefore quite energy-reliant. It’s family run and there is little information, but at its size, it doesn’t really matter.

• Cardone - on the books at zero but potentially worth up to 160m USD in royalty payments. It was an auto parts aftermarket provider that went south during Covid. They sold it to a larger competitor, for some cash but they took a loss and opted for the royalty solution, rather than put more capital into the business. I don’t know if there is more cash coming via royalties. It was a bad investment for them, but from here and for us going forward it is all upside, if anything. 

• Aldo (35% stake) 153 mn USD invested capital, bought in 2021. Aldo is a leading Brazilian distributor of solar power solutions for small businesses and households. According to BBU, Aldo is a market leader with a cost-efficient e-commerce platform and a large network of over 10’000 resellers. It should do fine, Brookfield is quite experienced in renewables. 

• DexKo Global (33% stake) 474mn USD invested capital, acquired in 2021. DexKo seems to be another decent business. It is a leading manufacturer and distributor of engineered components for industrial trailers and a broad range of towable equipment providers. According to BBU they have about a 50% market share in their core products and they are vertically integrated with inhouse distribution. Turnaround times are apparently half the industry standard. The business has an acquisitive past that has likely even accelerated under BBUs ownership with 16 add-on acquisitions since 2021, for an overall ~40 acquisitions since the current management team took over in 2016. They had some margin improvements and at some time EBITDA was already 40% higher than in 2021. It now stands at around 20-25% higher due to softer industry volumes at the moment. It looks like this one also has the potential to turn out quite well.

• Cupa Pizzares (23% stake) 100mn USD invested in mid-2022. The company is the global leader in natural slate roofing, with 20 owned quarries plus 24 manufacture facilities and apparently a 50% market share in that market (European focus). The company was PE owned previously (Carlyle from 2016-2022) and has done well over that time span. It seems like a nice nichy business where things more likely go well than the other way around.        

The walkthrough of the individual holdings with marks to market where appropriate and obvious comfortably leads to 9.5bn USD of value for BBU vs. 4.3bn of market cap. There is room for more than 10bn USD without being super aggressive, but there is no need to be more precise given the current discount. The ~10bn USD value also looks fine on a look through multiple EV/EBITDA. 

BBU is currently trading at a 7.6x look through EV/EBITDA - so very likely too cheap for the quality of the underlying companies. 

The proportional net debt + hold co debt + pref equity sums to 14bn USD + 4.3bn USD in market capitalisation gets us an EV of 18.3bn USD vs. a proportional EBITDA of 2.4bn (including Holdco costs). At 10x EBITDA the market cap would be 10bn USD. Not surprisingly BBU also looks cheap if one takes that route, rather than looking at all the individual holdings. 

Some thoughts on the discount and leverage in general

Finally, one can argue that there should be a discount due to the management fees and I have no issue with that. However, given where BBU trades, the shares have plenty of upside before that discussion becomes relevant. Going against the merits of a holdco discount due to the management fees is the argument of their ability to generate excess returns based on their past track record and the positive optionality that comes with all the no-recourse debt involved. Positive outcomes in BBUs portfolio quickly turn into multibaggers but those benefits from leverage don’t come nearly with the same risk a single company has to shoulder. The full control of the underlying companies also gives them the possibility to always commit additional capital in cases where it is required and makes sense without having to bear the same dilutive effects on the initial capital if one were to do the same in the public markets. It is certainly a source of excess returns in the PE world... 

I personally won't try to sell the idea that BBU should trade at a premium, but with its history of generating strong returns and the beneficial use of a lot of non-recourse debt on a diverse portfolio, one could argue for it without being completely insane. 

The debt in general is well structured and pushed out with an average maturity of 6 years and an average debt cost slightly below 8%. Only around 6% are due to refinance this year. I see limited near-term risk.

Finally, the good and the bad due to Brookfield's parenting

The public PE fund BBU has a supportive parent in Brookfield (BN) that still owns 68% of the company. I say supportive because that has been the case in the past. For instance, in 2022 BN provided BBU with 1.5bn USD in pref equity at 6% at an opportune time for BBU and besides the lowish coupon, the money came with the option for BBU to decide when to pay it back. They recently paid back half. The preferred transaction was certainly a more generous deal than BBU would have gotten elsewhere or BN would have offered any non-affiliated company. Operating within the BN consortium also helps BBU into controlling stakes on larger acquisitions without having to come up with all the capital themselves. 

The relationship of course also carries some risk. BN could try to extract more value or outright take the company private in scenario where it trades even weaker/at a higher discount than it does today. That said, while the risk is there if a large discount persists over a very long period, the chances of a take-under are likely low. Brookfield generally plays a very long game and keeping BBU public should be a lot more beneficial to them over the long term than extracting the discount for themselves in the short term. They would not only lose the fees for BAM but also a vehicle where they can raise additional permanent capital at times when BBU trades well like it did in 2017 and 2019, when they issued shares. 

Catalyst

A Clarios and BRK or other larger successful monetisation

Lower fed funds rates going forward

Additional holdco debt paydown