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Canadian alternatives giant Brookfield Asset Management hosted an investor day this week to explain its “tremendous opportunities”. One of them seems to be to administratively move its headquarters to New York.
Companies relocate all the time, but mostly for tax or business purposes. But it’s rare for major ones to do so. And what makes this so intriguing is that the move seems to be all about getting included in various US stock market indices.
Here’s the relevant bit of the transcript of the investor day (which was in New York on Tuesday), courtesy of AlphaSense. The speaker is Brookfield’s CFO Hadley Peer Marshall. FT Alphaville’s emphasis below:
. . . We want continue to broaden [our shareholder] base into the deepest pools of capital. And specifically, when we think about the feedback that we’ve received, it’s around further increasing the liquidity of BAM stock. And then as we’ve shifted more to a balanced US and the rest of the world from a shareholder holdings perspective, some of the feedback has been around inclusion into other stock indices on the global in the US side.
So a few of the steps that we’re contemplating taking are the first one is moving our headquarters to New York. Now this one make sense just because we have the largest percentage of our employees, our revenues and our asset management — asset management located in the US. A reminder for people not au fait with Brookfield’s byzantine structure, back in 2022 Brookfield Asset Management renamed itself Brookfield Corporation, and listed 25 per cent of its asset management business (since lifted to 27 per cent) which then assumed the original BAM name.
Brookfield Corp is in turn controlled by a group of senior partners led by CEO Bruce Flatt. Our MainFT colleague Mark Vandevelde wrote a masterful dissection of the Brookfield empire here.
Marshall said that management was also considering having Brookfield Corp exchange its 73 per cent shareholding in BAM (via an unlisted holding company) for shares in the listed entity. Here are the relevant slides from the presentation deck:
This would make its market cap go from the current C$25bn to the full C$92bn (about $68bn at pixel time).
But of course, this just be an optical thing and not improve the liquidity of BAM’s Canada and US-listed shares as long as Brookfield Corp hangs on to its 73 per cent stake (which it says it will).
So clearly this US HQ move is the most meaningful but, and despite the talk of “broaden” its shareholder base, it’s presumably because inclusion in various US stock market would be a lot more valuable than being one of the top-10 members of Canada’s S&P/TSX Composite Index.
We’ve seen a recent example of how powerful index inclusion can be with Super Micro Computers. Blackstone, probably the closest comparable company in the US, entered the S&P 500 almost exactly a year ago, and since then its market cap has climbed by about $40bn to $175bn.
Yes this is a facile way to indicate the impact. Brookfield’s shares have actually returned 28.4 per cent over the past year, only narrowly behind Blackstone’s 29.9 per cent total return over the period. There’s also been some recent research that indicates that the “index inclusion effect” has evaporated.
But it probably still matters — a lot. As we’ve previously written Morningstar estimates that the S&P 500 is now tracked by over $4tn of passive index funds, and serves as the benchmark for another $2.9tn of active investment funds. Then there’s all the non-fund money that in reality also less publicly tracks indices like S&P’s flagship US equity index.
TD Securities’ index guru Peter Haynes notes that inclusion in the S&P 500 is unlikely even if Brookfield Asset Management moves its HQ to New York (the index allows some discretion, and is apparently considering rules that would prevent superficial HQ moves for index inclusion purposes. Nor does he expect BAM to make it into MSCI or FTSE’s country indices.
But Haynes reckons that Brookfield would make it into Russell and CRSP’s US indices, and as the Morningstar chart below shows, those are still very big and influential.
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For comparison, the TSX index barely scrapes into the top 1000 indices as ranked by benchmarked and indexed assets.
Haynes calculates that BAM’s inclusion into the appropriate Russell and CRSP benchmarks would result in index fund buying of about 8.5 per cent of Brookfield’s overall float, or about 38 million shares.
It won’t happen in one go — the would probably stages of inclusion, and the likes of Vanguard, which uses CRSP, is particularly careful about being tactical and flexible in its purchases — but it would unquestionably have a big impact.
As Haynes wrote in his note, this is not just a Canadian issue. It was part of the motivation behind some of the London Stock Exchange’s recent exits, as international companies are willing to forgo even a lofty position in their domestic stock market indices “to chase the pot of gold at the end of the S&P rainbow”.
Brookfield management is correct in stating that the decision to move its headquarters to the US has only upside and no downside. That is true from the Company’s perspective, but not from the perspective of global markets and in this case Canada. We hate the fact that a simple stroke of the HQ pen can result in 8.5% of a company’s shares being sopped up by indexers in another country and leaving an issuer split into two jurisdictions. This does not make sense.
In the long run, we expect a fairly material increase in US market share for Brookfield at the expense of Canada’s market. While this decision in itself is not a death blow, it is yet another cut, one that will add to many others and leaves us concerned about the end look of Canada’s equity market, when eventually this number equals 1000.
Canada is not alone with this problem although other markets are fighting back. It is time to do the same.
We’re not sure what smaller markets can do to fight back against the gravitational pull of America’s financial system, but FTAV is pretty confident that with indices mattering more and more, it is only a matter of time before they get regulated as fiduciaries rather than publishers . . .
Further reading:
— Index providers are massively dull — and massively profitable (FTAV)
— The index providers are quietly building up enormous powers (FT)
— ‘Volmageddon’ fine may hint to era of stricter index regulation (FT)
