Brookfield Asset Management: A perfect predator

As a rule, the CEO of Brookfield Asset Management is studiously non-controversial. He rarely appears in public and has little to say to the media. Put-downs? Bravado? “We don't brag,” he says earnestly. “It always bites you afterwards.”

Instead, Flatt seems to go out of his way to paint Brookfield as boring. “We own 129 office buildings. Some are a little taller, some are a bit shorter,” he says laconically. The strategy? “We're in the business of buying assets of great quality at less than replacement cost.” The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. “We have no goal to be large or significant,” says Flatt.

“If [reaching our objective] meant we should shrink in size, we'd do that.” Even Brookfield's logo is understated, and its 2009 annual report looks like something thrown together at Kinko's. Move along, everyone, nothing to see here.

The reality is that this slender 45-year-old executive runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the eight years Flatt has been in charge, Brookfield has emerged as the world's biggest owner of prime office space — including some of the most prestigious towers on the Manhattan skyline — and its 165 power plants constitute one of the largest hydroelectric portfolios.

But what has really impressed observers is how Brookfield weathered the crushing downturn that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company didn't panic or go into hype mode. Instead, it quietly added to an already thick cushion of capital. And waited.

This focus on workmanlike deal-making makes Brookfield very much au courant. After two decades of celebrating brash mavericks and gamblers — dot-com dreamers, M&A tacticians, credit-addled empire builders — the zeitgeist, post-meltdown, has shifted toward those who play it safe. And Brookfield, a company run largely by accountants, was dull before dull was cool. Besides, the low profile is intentional, a kind of camouflage.

The company's fundamental strategy — buying expensive properties on the cheap — relies, after all, on others blowing their brains out by taking fliers, so it can come in to clean up the mess and cart off choice pieces from the carnage. Brookfield, in fact, is the quintessential example of what French social scientists Michel Villette and Catherine Vuillermot identified in a 2009 study as a key strategy of iconic companies: eschewing risk and stealthily positioning yourself to spot vulnerability in rivals, then pouncing when the moment is right.

This is one of the best such moments in recent history. The business landscape is littered with companies that gambled with cheap money and got caught with their shares down and their loans called. Brookfield, meanwhile, has amassed a nearly $10-billion war chest of its own and institutional investors' cash and has gone hunting.

After devouring an Australian port and railway giant and a few real estate portfolios, it's now tracking perhaps its most succulent prey: General Growth Properties, the second-largest mall operator in the U.S., which adopted the spendthrift ways of its customers, stockpiled a glittering array of trophy properties on credit, and when the markets seized, toppled into bankruptcy. Enter Brookfield, offering up its capital and restructuring expertise in exchange for control of the company.

Whether or not Brookfield secures the deal — the outcome may not be known until this fall — it's an important chapter for the company, says a close long-time observer who requested anonymity. “This could be a huge new platform for them. Or it could be a huge profit.” Some see it as an unusually risky play for careful Brookfield. But they don't appreciate its predatory ways.

During his tenure as CEO, Flatt has gradually molded Brookfield in his own image, emphasizing logic, simplicity and discipline. This stands in sharp contrast to the culture fostered by his predecessor, Jack Cockwell, whose complex deal-making and brash business style made him perhaps the most influential corporate leader of Canada's postwar years.

At its peak, the conglomerate that Cockwell forged with Edward and Peter Bronfman's money represented a third of the Toronto Stock Exchange's value and owned parts of more than 200 companies — including John Labatt Ltd., MacMillan Bloedel, Royal LePage and Royal Trust — connected in a web of holding companies. One analyst said the organizational chart from that period “looked like someone threw a plate of spaghetti on the floor.”

Flatt, the scion of an Investors Group founding family, grew up professionally at Brascan, but his most formative period — one that also shaped modern-day Brookfield — was the early-1990s recession, when the real estate sector index lost 90% of its value. Weighed down by billions of dollars of debt it couldn't refinance, the company had to sell its real-estate arm, Trizec Corp.

Flatt, who had joined the subsidiary Brookfield Properties in 1994, pushed his skeptical colleagues to immediately jump back in and grab what he saw as unprecedented bargains. Though the recession had wounded it, Brascan was in good enough shape to exploit the woes of others — notably Olympia & York Developments, owner of London's Canary Wharf and the World Financial Center in New York. Flatt then built on that base by homing in on prime office space, a strategy that enabled his subsidiary to ride the real estate rebound and sent its shares from low single digits in 1995 to $20 at decade's end.

No one inside was surprised when Cockwell passed the reins to the young Winnipegger. Months after taking over in early 2002, Flatt laid out his new game plan: the giant squid of a holding corporation would focus on operating in just three sectors — real estate, power generation and infrastructure, areas that could deliver consistent revenue, locked in by long-term contracts, and where assets tended to rise in value, making them relatively cheap to finance.

With this simplified focus, Flatt invited pension funds to put money into Brookfield-run investment funds, with the resulting management fees serving as a cushion for the company's own investment returns. Along with a focus on asset management came a more open attitude toward the financial community, in place of the terse, oblique communiqués that issued from Brascan under Cockwell. “The management style changed under Bruce to looking to public markets as a partner,” says one analyst. “Under Jack, it was a public company but run more as a private company.”

Despite the dramatic shift in direction, Brookfield's leadership didn't change much. Cockwell, now group chairman, can be seen almost daily at the Brookfield Place headquarters in Toronto, and none of the dozen or so senior managing partners left or was heard grumbling. It's an unusually collegial group, and the most senior people — especially top lieutenants such as Cyrus Madon, Jeff Blidner and Sam Pollock — function almost like knights of a round table, moving around the company's divisions as need demands.

“This is a very flat organization,” says Flatt (who, for the record, dislikes puns on his name). “At the end, there are probably 15 people, and they are a partnership.” Indeed, any of those people could step into Flatt's shoes. “These are all senior, senior guys, and they all get paid the same salary — a million a year plus a bonus,” says Mark Rothschild, a real estate analyst at Genuity Capital Markets.

When Flatt says that Brookfield is about its people, that hoary platitude is actually a key competitive edge. Brookfield's extended fraternity comprises some of the best-connected individuals in North American corporate and public life, including board members Jim Pattison, Frank McKenna and Trevor Eyton.

This spring, a CIBC World Markets report offered a list of about 100 business and government big wigs (out of 600-plus it identified) that the company's associates see regularly. “Brookfield's in the business of acquiring assets upward of $1 billion, and to get a chance at those, you need to strategically position yourself,” says CIBC analyst Alex Avery. That means being privy to intelligence and able to whisper in the right ears. This network is held together partly with the glue of shares.

About 40 of the most senior executives and directors own Partners Ltd., a private company that holds almost 20% of Brookfield's stock. “If you have that kind of holding, often in the tens of millions, even if you weren't actively involved in the business, you'd be prepared to help,” says Avery. “It's highly unusual.” And it equips Brookfield with an army of seasoned deal hunters.

Brookfield's biggest deal since the financial crisis was the 2009 acquisition of roughly 40% of Babcock & Brown Infrastructure, an $8-billion global portfolio of ports, railways and utilities. Aside from kicking in $2 billion in cash and sending in an army of financial and sector specialists, Brookfield had to negotiate with 25 banks and other stakeholders outside the relative order of bankruptcy protection.

Even for an outfit with a long history of tangled deals, this was a complex transaction, but the acquisition fit Brookfield criteria perfectly: a highly desirable portfolio, bought at a bargain, in a high-growth sector it knows well. “We watch hundreds of companies all the time,” says Flatt. “If one of them gets into trouble, we visit them and see if there's an opportunity for us to help.”