Brookfield Corporation (BN +2.38%) reported its first-quarter results earlier this week. The global investment firm posted strong results across all its operations and continued to execute its strategy.
As he does each quarter, Brookfield's CEO Bruce Flatt wrote a letter to shareholders. Here are three things investors need to know from that report.
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Macro events are just near-term noise
Bruce Flatt covered several topics in his quarterly letter. He started by discussing the current macroeconomic picture, which is dominating the headlines these days and driving much of the near-term movement in stock prices. Flatt wrote that while it's important to monitor macro events, they "tend to attract disproportionate attention relative to their long-term impact."
He noted that in the short term, capital flows, sentiment, and prevailing narratives tend to affect asset prices, especially when there's a lot of uncertainty. This price change "can create the impression that underlying fundamentals have changed, when in most cases business performance remains largely intact." What actually matters, Flatt noted, is that the cash flows of a business and management's ability to reinvest that capital at attractive returns are what determine value over the long term. So, "while price and value can diverge meaningfully in the short run, they will always converge in the longer term." This focus on long-term value creation drives Brookfield's investment strategy. The company aims to invest in businesses at an attractive entry point, operate them well, and allow compounding to work over time by avoiding capitulation during periods of market stress when there's a temptation to sell assets as prices drop.
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These megatrends have grown even more powerful
Another important aspect of Brookfield's strategy is to invest in companies capitalizing on major long-term growth trends. The three most prominent themes it has identified are digitalization, decarbonization, and deglobalization. These megatrends have only grown more powerful in recent years.
For example, while the company has been investing in the broader digitalization trend for many years by building out fiber networks, wireless towers, and data centers, the AI boom has launched a new wave of investment opportunities. Flatt wrote that "artificial intelligence is driving demand for a new generation of infrastructure in the form of AI factories -- industrial-scale computing facilities designed to train and run advanced AI models," creating a significant opportunity for the company to invest in building out this backbone infrastructure. Meanwhile, the digitalization megatrend has accelerated the decarbonization trend by driving a surge in electricity demand. That's providing the company with even more opportunities to invest in renewables and other low-carbon energy sources.
Private credit isn't the problem
Another topic Flatt touched on in his shareholder letter is private credit. The private credit market has grown significantly over the past decade due to capital needs from industry and constraints from traditional lenders. This disconnect provided alternative investment funds with a meaningful investment opportunity.
However, sentiment has shifted over the past year amid well-publicized private credit bankruptcies and concerns about further defaults, especially among software companies due to the potential disruption from AI. These headline-driven headwinds have weighed on Brookfield's stock, which has underperformed the S&P 500 over the past year.
The issue, in Flatt's view, isn't private credit as an asset class. He commented, "At its core, private credit is simply credit -- providing senior capital to asset owners and businesses, in return for a prioritized fixed return." Instead, the problem is more with the lender. "Credit outcomes have always been driven by what you lend against, how you structure transactions, and the discipline applied, particularly when capital is abundant." Brookfield's approach, through its partnership with Oaktree, "reflects a long-held philosophy built on a culture of disciplined underwriting, a focus on downside protection, and a consistent emphasis on risk-adjusted returns across cycles." He noted that the company invests where we have structural advantages and primarily in credit backed by real assets. As a result, it doesn't have material exposure to software, which is at the greatest risk of AI disruption. Instead, it's lending to companies building AI infrastructure, insulating it from a potential disruption while capitalizing on a meaningful opportunity to extend credit secured by real assets.
Brookfield remains a great long-term investment
Brookfield CEO Bruce Flatt reminded investors in his first-quarter letter of the importance of looking beyond the current noise and focusing on the long term. This approach should continue to pay off over the long run as the company invests in businesses that should grow in value as they benefit from megatrends. That strategy also informs its private credit investment approach, which focuses on fundamentals. These takeaways increase my conviction that Brookfield is a forever stock for my portfolio.
