Brookfield Asset Management Ltd. Q4 FY2023 Earnings Call

Thank you for joining us today for Brookfield Asset Management's earnings call. On the call today we have Bruce Flatt, our Chief Executive Officer; Connor Teskey, our President; and Bahir Manios, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor who will talk about our growing fundraising capabilities, and finally, Bahir, will discuss our financial and operating results for the business. After our formal comments, we'll turn the call over to the operator and take any analyst questions. In order to accommodate all those who want to ask questions, we ask that you refrain from asking more than two questions at one time. And if you have additional questions, please rejoin the queue, and we'll be happy to take additional questions at the end if time permits. Before we begin, I'd like to remind you that in today's comments, including in responding to in questions and in discussing new initiatives and our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities law. These statements reflect predictions of future events and trends and do not relate to historic events. They're subject to known and unknown risks, and future events and results may differ materially from such statements. For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website. And with that, I'll turn the call over to Bruce.

Thank you, Jason, and welcome to everyone on the call. Our results were strong in the fourth quarter, our best quarter and an overall excellent first year for Brookfield Asset Management. In total, we raised $140 billion of capital, which includes $93 billion raised over the past year and $50 billion coming from the pending close of the AEL insurance account with Brookfield Reinsurance. We were successful fundraising across our flagship funds, including new records for our infrastructure and private equity franchises. This past year, we fundraised across a broad set of complementary strategies and with an increasingly diversified set of global investors. We also launched a number of new funds, most notably Oaktree's lending partners fund, which shows promise in evolving to be a six flagship series for us. Our goal is to always have a focus on providing exceptional value to our clients. Our goal has always been to generate strong risk-adjusted returns by acquiring assets for value, leveraging our operational capability to grow cash flows, and compounding capital over the long term. By staying ahead of market trends and continuously innovating, we've been able to help our clients achieve their investment objectives in ways that truly matter to them. At the same time, this past year has been about making the necessary investments in our platform to position us for long-term success and growth. We've been expanding our global fundraising organization as well as building our capabilities within insurance and private wealth with the expectation that they will grow to become meaningful contributors to our annual fundraising in the near term. Fee-related earnings grew 6% to $2.2 billion and the distributable earnings grew 7%, also to $2.2 billion. The significant capital we raised over the past year sets us up for strong growth in 2024 and with much of the investment in our platform complete, our cost growth should moderate. The combination of faster revenue growth and slower cost growth should mean a strong year for FRE and DE growth. More broadly, it appears that inflation has tempered, interest rates have peaked, and the Fed soon will begin easing rates. Markets struggle in the face of uncertainty and these actions signal improved stability, resulting in increased investor confidence in pricing risk and therefore enhanced liquidity to capital markets. Transaction volume should pick up as well, which will enable more managers, including us, to monetize investments, return capital to partners, and in turn enable those partners to reinvest in private funds for what should be an excellent environment for investing. We are going into this year with more than $100 billion of dry powder across our businesses, despite investing over $50 billion last year, one of our most active years of investing. We believe the environment will lead to continued consolidation in the industry. This is a theme you've heard us talk about a lot before. We participated in this consolidation five years ago with our Oaktree partnership and we continue to look at strategic opportunities to further broaden and strengthen our franchise. This trend towards consolidation is especially true for areas of the alternative asset management space that are most in favor with investors and should attract more capital. Infrastructure, renewable power, and energy transition are expected to be among the fastest-growing alternative asset sectors for very good reason. Investors continue to allocate to the space because these are assets that can deliver four things all investors seek: market growth, principal safety in uncertain times, inflation-protected cash flows and long-term capital appreciation. We were an early mover into these areas after we identified that decarbonization, deglobalization and digitalization were megatrends that were shaping the global economy. Governments, corporates and other stakeholders have made commitments to net zero targets and are grappling with energy security, supply chain resiliency, and meeting the exponentially growing demand for data. These challenges will require trillions of capital investment and our infrastructure, renewable power and energy transition businesses are well-positioned to deliver solutions. Today, we manage nearly $300 billion of assets across these businesses, making us the largest and most experienced in the space. We've used this first mover advantage to build critical expertise, deep relationships, and we use our scale and source proprietary deals to pursue investment opportunities that are either too large or too difficult for most investors to execute. We believe that our scale, diversity, reputation and strong track record distinguish us in these areas, and we continue to invest in our franchise and strengthen our brand, and we believe we'll come out of this period of consolidation even more dominant than we entered. With that overview, let me turn it over to Connor to speak about the capabilities and strategy of our fundraising platform.

Thank you, Bruce. Next, we will speak to our operations and how we have scaled our business, expanded the breadth of our product offerings, and enhanced our capabilities across capital raising channels. Today, our diversity across asset classes, product strategies and fundraising sources enables us to raise and deploy capital more consistently year to year and in different market environments. This is increasingly a key differentiator in our franchise. This past year is a good example of how our partnership approach and investment track record have allowed us to raise larger flagship funds and deliver on our ambitious capital raising targets. At the same time, we have been expanding and diversifying our suite of complementary funds. Today, we have over 100 active funds across our business that cover a wide range of asset classes, products and strategies, many of which we are fundraising for at any given time. In addition, we've also been building out our fundraising capabilities across an increasing number of channels. The result is that we can expect to raise approximately $75 billion annually separate and apart from our flagship funds, which are typically raised every few years. That should allow us to annually raise $90 billion to $100 billion on average at this point in time. Let us break down that figure a little bit. While most of our fundraising will continue to be driven by our institutional sales team and via our public affiliates, we are continuing to grow other channels to augment and diversify our fundraising. A good example of this is the growth of our insurance solutions channel. As Bruce mentioned, we expect BNRE's acquisition of AEL to close shortly, which will bring our fee-bearing insurance capital up to more than $80 billion from approximately $35 billion today. At the same time, Brookfield Reinsurance will become one of the largest writers of annuities in the United States. And by employing the same operational enhancements utilized following the acquisition of American National a few years ago, we expect to meaningfully grow AEL's pace of annuity underwriting. And over time, we should be able to organically raise $15 billion to $20 billion of insurance capital annually, and that would be independent of any additional insurance acquisitions that BNRE may do. We have also been building Brookfield Oaktree Wealth Solutions, or BOWS, which is our private wealth business. We have approximately 150 dedicated employees across 10 countries to meet the growing needs for alternative assets in the private wealth market. We have partnered with more than 50 wealth groups worldwide in delivering institutional quality investment strategies to their clients. We currently have five perpetual strategies specifically developed for private wealth investors across credit, real estate and more recently, infrastructure. At the beginning of last year, we launched the Brookfield Infrastructure Income Fund to investors in Asia-Pacific and Europe, and recently, we launched the strategy in the United States. The strategy has been very well received and we've raised almost $2 billion over the past year. In total, we've raised approximately $7 billion of capital through our private wealth channel last year and over time; we expect this channel to grow to $12 billion to $15 billion of fundraising annually. Switching gears now to product development. Core to our success has been our adaptability to the ever-changing market environment and our focus on adding new products and solutions for our clients. The majority of our new products come organically from in-house product development. Our product development function works across our businesses and investor segments to leverage our investment expertise and global presence to develop new solutions to meet our clients' investment objectives. This serves as an important competitive advantage, allowing us to differentiate our platform from our competitors. It enhances our relationships with clients because we can create tailored strategies to meet their needs and proactively adjust to ever-changing market conditions. As a result, we expect the role of new product development to be an even bigger driver of our business going forward. Some of the new products and strategies we've recently announced include a €10 billion private investment grade debt fund with the purpose of originating and distributing high-quality private credit investments. This initial fund will launch with €2.5 billion of seed funding, in part from Brookfield Reinsurance. Another example is a joint venture with Sequoia Heritage called Pinegrove, which will focus on acquiring secondary funds in the venture capital and technology sectors. Pinegrove is raising an inaugural fund in the first half of 2024 with $500 million in seed capital collectively from Brookfield and Sequoia. We also continue to leverage our deep relationships with investors in the Middle East and are launching a Middle East private equity fund this year as well. This region continues to be one of the fastest growing in the world and we have established ourselves as the best-positioned sponsor in the market. Also, with our private equity franchise, we'll be launching a newly formed financial infrastructure platform. This strategy focuses on opportunities in digital payments and services, a key pillar in the digitalization of the global economy over the coming years. Lastly, we also recently announced the launch of our multibillion-dollar Catalytic Transition Fund, CTF, in partnership with UAE’s ALTÉRRA. ALTÉRRA committed $1 billion of seed capital into this fund, which will have a differentiated and focused mandate on raising and deploying capital exclusively in emerging and developing markets, with a focus on energy transition, industrial decarbonization, sustainable living and climate technologies. In addition to product development, at the same time, we always seek to strategically and selectively invest in and partner with managers that have capabilities that are complementary to our platform. We do so when investing can be done accretively and when building a product organically would take too long. This can be done at scale like we did with Oaktree in credit, and over the past five years, we've partnered in many ways, including building our private wealth business, scaling our insurance business and sharing valuable insights across our portfolios. However, we also selectively make smaller, tactical investments in managers that we believe can help scale and are complementary to our business. One example of the latter approach is our 50% interest in LCM, a European-based private credit alternative asset manager. Since we began our partnership with the firm, LCM has tripled the size of their main fund in addition to growing across their platform. We think there is an opportunity to do more of these tactical acquisitions. These will be managers that can be assisted by the overall scale of our business and capital, and managers whose growth can be accelerated when brought into the Brookfield ecosystem. Most will benefit from our insurance assets under management and from our client relationships. In addition, we can provide these managers with the proprietary data insights that we gather from our more than $900 billion of assets under management. In order to manage our growing private credit capabilities across Brookfield, notably Oaktree, LCM, our SocGen partnership and our insurance investment strategies, we recently placed all of our credit strategies under a new credit group which is led by Craig Noble. Craig is a Brookfield veteran. He's been with us for approximately 20 years and was most recently responsible for our institutional and wealth fundraising, prior bringing all of our credit strategies together with our newly formed credit group allows us to work effectively across our credit teams, provide excellent returns and maximize our ability to create value for our clients. We are confident that credit will be a meaningful driver of BAM's growth over the next decade, given the industry tailwinds and our collective focus. This adjustment will help us achieve that. We will now turn the call over to Bahir to go through our financial and operating results for the quarter.

Thank you, Connor, and good morning, everyone. For this morning's call, I will focus on three areas: our financial results for 2023, a recap of our capital raising efforts for the year, and our outlook for 2024. First, regarding financial results, our fee-related earnings for 2023 were $2.2 billion, which is a 6% increase from the previous year. This growth was mainly due to the capital raised for our flagship funds, including our fifth infrastructure fund and sixth private equity fund, as well as investments through our credit and complementary funds where we earned fees on deployed capital. These gains were partially offset by lower catch-up and transaction fees, decreased fees from our permanent capital vehicles, and increased costs associated with scaling our operations in 2023. Distributable earnings for the year were also $2.2 billion, marking a 7% increase compared to 2022, primarily driven by the rise in our fee-related earnings. By the end of 2023, our assets under management totaled $916 billion, an increase of $126 billion or 16% from the end of 2022. Our fee-bearing capital stands at $457 billion, up $39 billion or 9% year-over-year, and we expect this to surpass $500 billion with the upcoming AEL deal. This growth in fee-bearing capital was fueled by strong inflows and capital deployment over the year, in addition to higher valuations of our permanent capital vehicles, though some capital was returned to clients. During the year, we deployed $58 billion in investments, achieved over $30 billion in monetizations across the business, and finished the year with $107 billion in uncalled fund commitments. Regarding fundraising, we had inflows of $93 billion over the past year, which is anticipated to exceed $140 billion once the AEL transaction concludes, bringing approximately $50 billion in managed assets. The inflows were diversified across around 50 strategies, with $13 billion coming from Brookfield's Reinsurance business. Since our last earnings announcement, we held several significant fund closes, raising a total of $33 billion in capital. Some notable updates since the start of the fourth quarter include completing the final close for the fifth vintage of our global infrastructure fund, reaching a total strategy size of $30 billion with around 200 investors, which is 40% larger than the previous fund, and we are currently 40% deployed across six large-scale assets. Additionally, we finalized the close of our infrastructure debt fund, exceeding $6 billion in strategy size, with over 60% of investors being new to this strategy, highlighting Brookfield's leadership in infrastructure debt. We also completed the first close for the second vintage of our flagship global transition strategy at $10 billion, raising over $6 billion in the fourth quarter alone, including a $3 billion commitment from ALTÉRRA. In real estate, we are completing the first close for the fifth vintage of our real estate opportunistic fund strategy at $8 billion, with the final close expected later in 2024. Oaktree raised $30 billion across its franchise in 2023, with nearly $10 billion secured in the fourth quarter alone, including $2 billion and $1 billion for its opportunistic credit fund and strategic lending partners fund, respectively. Oaktree's pipeline for additional private credit fundraising is robust, with plans to complete these fundraises later in 2024. Looking ahead to 2024, we expect it to be another strong year for fundraising, with four flagship funds still in the market and around 50 strategies in various stages of fundraising. We aim to raise another $90 billion to $100 billion in 2024, excluding the AEL acquisition and any capital raised as part of our 2023 plans that extend into January this year. We also have over $100 billion in dry powder available for deployment in what promises to be an attractive investing environment, which should significantly boost our fee revenues in 2024. Given our efforts in 2023 to build out our investment teams and infrastructure for our new fund strategies, we expect expense growth to level off in 2024, leading to improved margins across our business. Overall, we anticipate considerable growth in our fee-related earnings in 2024. Additionally, I am pleased to report that the Board of Directors has declared a dividend of $0.38 per share for the first quarter of 2024, payable on March 28 to shareholders of record as of February 29. This represents a 19% annual growth rate in dividends, aligning with the higher end of our target growth range established when the company was formed last year. This dividend increase reinforces our positive outlook for earnings growth moving forward. That concludes our prepared remarks for this morning. Thank you for joining the call, and we will now open it up for questions.

Thank you. Our first question will come from Brian Bedell with Deutsche Bank.

Great. Thanks. Good morning. Thanks for taking my questions. Just to clarify on the fundraising outlook for 2024 and appreciate all the comments on the detail, I count about $110 billion potentially with another $35 billion or so to go with the flagship. So just wanted to see if that seemed correct. And as the $10 billion transition first close is that all in calendar 2024, or was some of that in the fourth quarter?

Good morning, Brian. Thanks for the question. I'll maybe take that in two parts. The first, maybe to answer your second question there. What happened at the end of 2023 is we completed our fundraising, but almost entirely to service some of our largest LP partners around the world. They essentially committed to a number of our funds in 2023, but they needed to utilize 2024 allocations. So we did the fundraising work in 2023 and we closed it in the first couple of weeks of January. And that's what causes some of the slip from Q4 into the early part of the year. We are not double counting those numbers when we give our outlook for 2024. We are treating that as 2023 raised capital. And therefore, as we look ahead to this year, we do very much expect it to be in line with that call it run rate average of somewhere between $90 million and $100 million, excluding the increase due to AEL closing.

Got it. That's super clear. And then just as a follow-up on insurance, I appreciate the color there on the $12 billion to $15 billion of annual annuity production, just I guess maybe longer term, what's the appetite to do even more deals over time at the parent, the capacity at the parent to do more insurance deals and bolster up this division even to a larger extent and expand that $12 billion to $15 billion in future years?

Great question, Brian. That will be up to the team at BNRE. However, with the upcoming closing of the AEL transaction, that business has significant scale in the United States, becoming one of the market leaders and capable of delivering substantial organic growth. Therefore, if BNRE considers further deal activity, we expect they may look at alternative markets beyond just the United States.

Thank you. Our next question will come from the line of Cherilyn Radbourne with TD Cowen.

Thanks very much, and good morning. Connor, I wanted to start with a question for you. In the BGTF press release earlier this week, you were quoted talking about how one of the emerging trends in transition investment involves supplying renewable power to the data and technology sector. And I was just hoping you could elaborate on that a little bit and talk about how much of the second fund you think will be devoted to that type of activity.

Good morning, Cherilyn, and I appreciate your question. To provide some context, it's clear that today’s leading technology companies are among the largest and fastest growing businesses. Their growth is largely driven by cloud services and artificial intelligence. A key aspect of delivering cloud and AI is the expansion of data center capacity, which presents a significant opportunity for our infrastructure business due to our robust data center platform. However, one important point that might not be fully recognized is that the new large-scale data centers needed to support cloud and AI growth are quite large and demanding in terms of computation and energy. Consequently, placing one on a power grid can have destabilizing effects. Major tech companies are looking to establish multiple data centers on each power grid globally. This situation means that to obtain permits for data centers, a power solution must also be provided. In a way, access to power is now essential for the growth of large tech companies. This creates a substantial opportunity for Brookfield, as we are potentially the only provider able to offer both large-scale data center capacity and extensive clean energy solutions worldwide to support these tech companies' expansions. This is not just a future market opportunity; it’s very much relevant today. Success in this sector favors those with the capital, capabilities, and the past investments in infrastructure and platforms to cater to the needs of these growing tech firms. This trend has significantly driven our business in both infrastructure and renewable power. To directly answer your question, I anticipate that renewable energy will continue to represent about 35% to 50% of our global transition fund.

That's great color. Thank you. And then, separately, the letter to shareholders mentions that your existing LPs made a lot of crossover investments in the latest round of fundraising. Can you talk about what that sort of crossover ratio is across your client base currently? And where you think that ratio can go based on your benchmarking?

Certainly. The ratio of investment sources can vary between funds, but a general guideline is that about 20 to 50% of the capital we raised in 2023 came from existing fund investors renewing their investments, 25% came from crossover investors, and the remaining 25% from new investors. This distribution serves as a useful overview. Notably, the 25% from crossover investors has been growing the fastest among the three categories, which reflects our strengthening relationships with clients and our ability to provide more products that align with their interests.

And so just on average, to dig a little deeper there like on average, how many funds does the average LP invest in with you, and where do you think you can take that over time?

Certainly. So the number today is about two. The average LP we have is in approximately two of our funds, two of our strategies. We think there's lots of runway for growth in that number. We could see that number doubling over time. It is a process and something we work with our clients on, but we do need to see that number moving in only one direction.

Thank you. Our next question will come from the line of Alexander Blostein with Goldman Sachs.

Hi, good morning. Thank you for the question as well. So Connor, lots of discussion around product development and helpful color, obviously around the $75 billion plus minus that you guys expect to get over time per year outside of flagships. Curious how that impacts your balance sheet strategy. So with respect to any GP co-invest to kind of seed some of these products and accelerate the growth. How do you think about utilizing something in that $3 billion cash that you currently have on the balance sheet? And I guess related to that, how does that inform your acquisition strategy as well?

Hey Alex, it's Bahir. I'd like to start by discussing our balance sheet strategy, and then Connor will add some insights regarding acquisitions. As we mentioned in our Investor Day and last quarter's call, our immediate focus for the available balance sheet resources will be to make GP commitments in several complementary equity strategies. Additionally, we will use some of that capital to establish new verticals, introduce new strategies, and pursue selective GP acquisitions. This is our strategy, and we are concentrating on various near-term initiatives that Connor previously highlighted. We will allocate capital towards Pinegrove, our technology secondary strategy, and our special investment strategy, or BSI, within our private equity group. We are committing capital to two secondary strategies, one in infrastructure and another in private equity. Furthermore, we are excited about two new initiatives we discussed today: a Middle Eastern private equity fund and a financial backbone or infrastructure strategy. While we are still finalizing our plans and do not have all the final figures, I wanted to give you an overview of the wide range of activities we will undertake to support many of our business units. These strategies will significantly enhance our franchise moving forward. Connor will elaborate on GP acquisitions.

For sure. And I don't have much to add beyond what Bahir said, other than to say that we're very fortunate to have very strong financial resources on our balance sheet. And between some of the tactical GP M&A that we mentioned in our remarks and the seeding of the new product development, that is where we expect the vast majority, if not the entirety of our balance sheet to go towards. We certainly view those as both the most accretive and the most growth enabling opportunities for that capital.

Great. That's helpful. Thanks. And my follow-up is around the fundraising targets you've laid out for 2024. So as we sort of think about the $90 billion to $100 billion of fundraising you expect to see this year, as the business becomes more diversified, the sources of that have obviously expanded. So you have insurance, you have traditional style, kind of LP, GP funds, you got wealth. So, help us maybe frame, what's the fee bearing capital associated with that $90 billion to $100 billion. And then ultimately, what's kind of the blended fee rate you guys expect to come in. And I understand it's not going to all come in on day one, so it's not all going to hit in 2024, but help us maybe think about how this fundraising dynamic translate into actual management fees. Thanks.

Hey Alex, it's Bahir again. There's probably a lot of details. As you can imagine, we've got, as I noted in my remarks, we've got 50 strategies that we're going to be out fundraising on. And that's just on the, what we call the complementary strategy side of things, in addition to the four flagships. So, with respect to fundraising, the way for 2024, the $90 billion to $100 billion target that we've set out for ourselves, you should expect a third of that to come from the flagships that we're still fundraising for. And as you know, we earn fees on committed capital there. A third will come from the complementary strategies; you could say half of those will come from equity related strategies. So, financial infrastructure, Middle Eastern private equity, catalytic transition, secondaries, et cetera, and half of those will be from credit funds. So we'll be out in the market next year with our real estate finance fund. Our royalties business is growing, our consumer finance business, LCM is also growing. Number of strategies in Oaktree, 17Capital, et cetera, lots of great things happening there. So, broadly speaking, maybe half of that will be based on invested capital versus committed capital, and it generally takes us three years or so to invest that capital. And so again, third comes from flagships, third from complementary strategies about 15% or so, 20% comes from insurance inflows that Connor touched on. We'll get paid on those right away, as soon as we get them. And then there's your normal course co-investments that we do, perpetual strategies, semi-liquid, et cetera, so, lots of things. And I'd say from a fee perspective, the average fees that we've had over the last couple of years, which is over 100 basis points will be consistent. We expect that to be consistent heading into 2024.

Thank you. Our next question will come from the line of Mike Brown with KBW.

Hi, great. Thanks for taking my questions. Just wanted to start on the insurance side of the business. Can you maybe just expand on the timing for the AEL close? I think the hope was a year-end close, but I understand regulatory approvals take time, but what's maybe the updated view on that and anything you can maybe expand on as to what has caused it to not yet close. And then just in addition to the scaling of the insurance business at Brookfield Corp., do you think you have the right asset mix and scale to continue to service the insurance balance sheets, like for example, do you expect to need to kind of continue to scale the ABF business? And as you do so, does that actually set you up well to win some more third-party insurance AUM over time?

Mike, thanks for the question. In terms of the AEL closing process, I would say it's very normal course for a transaction of this type. In November, we received overwhelming support from the AEL shareholders. We continue to work through the regulatory process and I would say we continue to target closing shortly. Nothing really to report and certainly nothing out of the ordinary in how that process is progressing. In terms of how our platform is set up to service that insurance balance sheet and third-party insurance clients, we feel that we are extremely well-positioned today and will only go from strength to strength in that regard. Really, our process of being well-positioned to service insurance started in 2019 with our partnership with Oaktree and giving ourselves access to one of the largest and broadest credit franchises in the world, obviously, with credit being a key asset class to service insurance, when you are able to pair credit with the long duration, inflation linked assets that we have across real estate and infrastructure and renewables, we really feel that we have a product suite that is relatively unmatched in terms of servicing those clients. All that being said, there's room to run. And as we think about some of those tactical M&A opportunities, one that is top of mind, are other credit type initiatives that that may be well suited to service insurance clients. So your question is spot on. We think we're well-positioned today, but can go from strength to strength in the future.

Thank you. Our next question will come from the line of Bahir Manios with J.P. Morgan.

Thank you for the detailed information. I have a question for Bahir. In 2023, the consolidated margin was approximately 54%. As we look ahead to 2024, there are several factors that are coming together, including significant fundraising efforts that will take place throughout the year. Is there a chance that the margin could return to the 56% level, similar to what we saw in the previous year? Additionally, what is the potential for margin expansion that we should consider beyond 2024?

Hey Mike, certainly. So, look, when we're reporting and usually refer to our margins, we do it on sort of a proportionate basis. So taking all the Brookfield related activities and taking Oaktree at its share, et cetera, and to come up with a net to BAM proportionate sort of margin of 56% for the year. So that's down 200 basis points from the prior year. And our target starting in 2024 is to get back to certainly prior year levels and even higher for the years beyond. Lots of execution ahead of us. But that is at least a target that we've set out for ourselves internally as an organization.

Thank you. Our next question will come from the line of Craig Siegenthaler with Bank of America.

Hey, good morning, everyone. My first one is another one on AEL. There's quite a few alt managers with partnerships with annuity underwriters now, and they're all looking to grow. So it looks like competition is intensifying. At the same time, interest rates are now falling, which do indicate that annuity sales may also go down. So I know the ROE and NIM doesn't exactly matter for BAM. It's more of a BN issue. But higher competition could impact your retail channel flow. So my question really is what are your thoughts on the competitive landscape today?

Good morning, Craig. Thanks for the question. There would be two answers to that question. One, the nice thing about the AEL transaction is we have a playbook that we just executed on through American National, and we knew exactly what we did there in order to drive growth and increase profitability in that business. And we see a lot of the same attributes and opportunities upon closing AEL. And yes, the market backdrop will influence that. But we think a lot of the near-term performance and growth is going to be within our control. And while interest rates and competition may have an impact, the second point is, upon closing this transaction, we have very meaningful scale in the United States, and that will be a key differentiator and a competitive advantage that positions us well, even in a differing interest rate environment that may be more competitive. We think our scale will continue to provide a competitive advantage and a bit of a moat that will allow us to continue to drive that, that call it $12 billion to $15 billion of growth annually.

Thanks. My fault is on real estate fund five. So the last two vintages were $15 billion. You already raised $8 billion through January, so more than halfway to the prior sizes. I wanted your perspective on kind of recent conversations with LPs, feedback from the Road Shows. Do you think you're going to be able to hit the $15 billion level by your final close, which I think you said will be later this year? So we're penciling in and around 4Q 2024 for the final close of real estate fund five.

Yes, like very little concern. We're thrilled with the traction that the fund has been getting, and really, it's important to recognize what our flagship fund offers. This is a fund, an opportunistic real estate fund that has delivered 18% net IRRs across four vintages to date, and is, for lack of a better term, perfectly suited for the current market environment. So I would say the traction is very strong. A first close at more than 50% of the fund target is a very, very strong indication. And a point we would highlight is that's very much in line with the previous funds as well, in terms of their first close. And perhaps the thing that gets us really excited is the re-up rates we're seeing from our clients are particularly strong in real estate, and that's really a function of our franchise and something that gives us confidence in hitting that target fundraise this year.

Thank you. Our next question will come from the line of Nik Priebe with CIBC Capital Markets.

Okay. Thanks. Wanted to ask a question about fundraising dynamics and your experience with the second iteration of the transition fund. I think you've suggested that you're anticipating an expansion in the number of LPs in fund two. But considering that the vast majority of assets in the first fund are still unrealized as you seek to broaden the investor base, does that create an impediment for a subset of investors? And in that context, not to put the cart before the horse, but would you expect more success or momentum on that front for the third vintage, specifically considering that the inaugural fund at that time would be a bit more mature in its lifecycle?

Thanks, Nik. Perhaps a few things to unpack there. The first, I would say is a, let me start by saying yes, we have a very strong belief that the number of LPs in BGTF II will dramatically, meaningfully exceed the numbers of LPs in BGTF I. The first reason is a macro reason, which is, although we're only call it three years between fundraising for successive vintages. Two things have happened in the market on a very accelerated pace over those three years. One is many institutional investors around the world either now have a transition allocation or they have at least determined where within their business transition investments sit, and they have a dedicated pool of capital towards those types of strategies. That dynamic has increased meaningfully versus 2021 and therefore we are seeing a much broader opportunity set in terms of LPs looking to deploy in these types of strategies. The second one is entirely commercial, which is the last two or three years have demonstrated to market participants that investing in transition is a very, very attractive risk-adjusted return and a very large and growing attractive commercial strategy. And therefore, we are seeing not only bigger allocations, but more investors allocating to the space. If those are the macro dynamics, the comment I would make more specific to our cadence of coming back to the market is yes, we don't have realized marks in BGTF I yet, as a result of the fund only being largely invested over the last couple of years. But what we're seeing from LP partners, both existing and new potential partners is it's very clear some of the key macro trends that we got out in front of, and some of the very attractive value entry points we secured in that BGTF I fund. And therefore, while there aren't realized marks that people can rely on, the value entry points that we were able to secure using our scale and using our operating capabilities are very obvious to investors and I would say quite supportive of our fundraising for BGTF II. So is it an unusual dynamic? Perhaps. Do we view it as an impediment to fundraising? No, we do not.

Okay. That's good color. And then just shifting gears, I understand the way that carried interest is shared between the manager and the corporation. It won't be a meaningful contributor to the distributable earnings in the immediate future. But I was wondering if you could talk a little bit about how much carry you've accrued so far, and just how big you envision that component of the earnings profile becoming in the longer run, say five years from now?

Certainly. And maybe just as a reminder to everyone, at the time of the spinout, accrued carry was left at BN. So we were starting from a clean slate. And then on go-forward carry, one-third goes to BN and two-thirds remains with BAM. So exactly as was just mentioned, we do not expect realized carry to be a meaningful part of our DE for the first five years post spinout. To date, our accrued carry has reached about $200 million. But we expect that to continue to grow very, very meaningfully going forward. And by the end of the decade, I think in our Investor Day forecast, we suggested that by 2029, we expect to see realized carry in approximately the $2 billion range with that more than tripling in the three to four years following that. So while it is a bit deferred in the future, this becomes a very meaningful driver of our economics come the latter portion of the decade.

Thank you. Our next question will come from the line of Kenneth Worthington with J.P. Morgan.

Hi, good morning, almost, good afternoon. Thanks for taking the questions. We're seeing renewed concerns about the commercial real estate market in the U.S., I would say punctuated by some comments by Janet Yellen, highlighting some risks here. How do you see the investment in realization environment sort of developing in 2024 in your real estate business broadly, as the year continues to roll on?

Certainly. There is clear evidence of some stress in segments of the real estate market. However, while this temporary stress affects certain players, it also presents opportunities for others. Given the strength of our real estate franchise and our funding methods, we are well-positioned to navigate this landscape and continue refinancing our operations. A key point often overlooked in the current real estate scenario is that high-quality underlying assets are performing exceptionally well. The challenge lies in funding and liquidity rather than operational performance, which is evident in our portfolio. By combining that strong operational performance with our funding approach, we anticipate successfully weathering this situation. This is where opportunities arise. Our BSREP franchise is gaining good traction in the market, and it is well-equipped to leverage the current environment and secure attractive entry points, which explains our strong fundraising success. Regarding asset liquidity, it’s worth noting that while interest rates increased in 2023, the more critical factor was the uncertainty surrounding their trajectory. This uncertainty hindered capital recycling and monetization efforts. We observed that high-quality assets, particularly small to medium-sized ones, could still attract strong bids, and we were able to monetize assets across all our platforms in this way. Conversely, large-scale monetizations proved more challenging. As we expect interest rates to stabilize, we anticipate the market rebounding in 2024. It will take time, but we believe it will pick up speed throughout the year. The positive aspect for us is that we utilized our scale to invest in 2023 when there were few bidders, opting not to rush into asset realizations in that environment and instead wait for more favorable conditions. Overall, we anticipate liquidity improving through 2024, not just in real estate, but across our asset classes, as the market uncertainty diminishes with stabilizing interest rates.

Okay, thank you. I have a clarification for Bahir. Credit experienced a significant increase in inflows and outflows this quarter, and it appears that the insurance segment contributed greatly to that. Is there a seasonal aspect to the fourth quarter, or was it primarily Argo that influenced the fourth quarter inflows and outflows? Additionally, regarding the insurance contribution to your fundraising target, is the $15 billion to $20 billion figure a gross number, or is it net of the outflows associated with the insurance segment? I'm trying to understand this in relation to your long-term fundraising guidance.

You're absolutely correct, Ken. The fourth quarter insurance inflows benefited significantly from the Argo transaction we discussed. Regarding the outflows within credit, I would like to clarify that with you after the call, but it may have involved some funds that reached the end of their cycle, if I recall correctly. As for the last point, the $15 billion to $20 billion is a net figure we're using based on the forecast for the various platforms we've established in our insurance business. Besides the annuities business that tends to get a lot of attention, Brookfield Reinsurance is also developing a sizable pension risk transfer business in the U.S., where it began bidding on mandates in late 2023. We anticipate considerable growth from that channel in 2024, and we are also working on building a similar business in the UK, which is another significant market.

Thank you. Our next question will come from the line of Mario Saric with Scotiabank.

Hi, good afternoon. Just two quick ones on my end. Bahir, your comment on expected outsized growth in FRE in 2024. Is that expectation or the definition of outsized kind of is that relative to 2023 actual growth or your target kind of FRE growth of 15% to 20% over time that you outlined at the Investor Day. I just want to clarify kind of what you thought about when you said outsized.

Hi, Mario. I apologize if I caused any confusion with my definitions. We aim for a compound annual growth rate of 15% to 20% from an FRE perspective during the planned period. To clarify, I believe 2024 will surpass that target. The significant capital inflows we received in 2023 will be a major factor, along with expenses stabilizing, as we've mentioned. Additionally, we have a strong pipeline for 2024. That's what I intended to convey.

Perfect. Okay. And just as a quick follow-up on your commentary on the margin coming back to 2022 levels i.e. about 200 basis points up year-over-year, is that inclusive or exclusive of AEL and the capital coming in from that?

It’s all in, Mario. It's all inclusive.

Thank you. That concludes today's question-and-answer session. I'd like to turn the call back to Connor Teskey for closing remarks.

Great. Thank you. Go ahead, Jason.

Great. I'll just say, if anyone should have additional questions on today's release, please feel free to contact me directly. Thank you, everyone, for joining us, and we'll see you next time.

This concludes today's conference call. Thank you for participating. You may now disconnect.