Investing in private equity might seem like a venture exclusive to millionaires, but in Canada, there’s a way for more people to get a slice of the action.
A relatively lesser-known Brookfield entity, Brookfield Business Partners (TSX: BBU.UN), offers an interesting pathway to private equity exposure without the need for deep pockets.
Brookfield Business Partners stands out on the TSX for its distinctive structure as a limited partnership, operating quite differently from your typical public company.
Here’s a straightforward introduction to those interested in dipping their toes into the world of private equity through this accessible option.
What does Brookfield Business Partners do?
Brookfield Business Partners operates as an investment firm that zeroes in on private companies, meaning those that aren’t listed on any stock exchange. Their approach is built around a strategy known as capital recycling.
This involves purchasing underperforming or undervalued businesses, improving their operations and financial standing, and then selling them for a profit.
Imagine buying an old, rundown house, renovating it, and selling it for double the purchase price – that’s capital recycling in the business world.
The firm predominantly invests in three types of sectors: business services, infrastructure, and industrials. They look for companies that have an average of $850 to 900 million in adjusted EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization.
In simpler terms, this metric helps investors understand a company’s operational profitability without the effects of financing and accounting decisions.
Some of Brookfield Business Partners’ notable investments include Sagen MI Canada, CDK Global, Clarios, and Scientific Games – these are private residential mortgage insurers, automotive software providers, and automotive battery manufacturers, respectively.
How effective is Brookfield Business Partners?
A prime example of their successful capital recycling strategy was their investment in a Nuclear technology services company.
Purchased for $4 billion in 2018, Brookfield Business Partners implemented strategic changes in management, invested in technology, and overhauled the organizational structure to enhance the company’s value.
Their efforts paid off handsomely when they sold the company for $8 billion, with total proceeds of $5 billion, of which $2.2 billion went to Brookfield Business Partners.
This transaction resulted in a 6x multiple on invested capital and a 60% internal rate of return (IRR), illustrating a highly successful investment turnaround.
In layman’s terms, they made six times their original investment and achieved an incredibly high annual return, demonstrating their skill in transforming and profiting from their ventures.
Should you buy Brookfield Business Partners?
I believe Brookfield Business Partners could find a place in an investment portfolio, but with a note of caution.
It’s probably best suited for investors who have already built a solid foundation with blue-chip Canadian stocks and are looking for additional, diversified exposure to private equity.
In essence, Brookfield Business Partners could be an exciting addition for those seeking to spice up their portfolio with private equity investments, provided they’ve already secured a stable base with more straightforward, traditional investments.
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