Entering text into the input field will update the search result below

Brookfield Renewable: Stay Away As Brookfield Is Channeling Fees To The Top


  • I've covered BEP before and was quite bullish on the company.
  • But recently I discovered just how much upside the fund gives up in fees to Brookfield.
  • I take a deep dive into Brookfield fee structure, discuss management incentives and present my playbook for the company.
The word fees levitates on yellow background.

cagkansayin/iStock via Getty Images

Dear readers/followers,

I've written quite extensively about my bullish outlook for renewable energy and consequently I've covered a number of interesting renewable energy plays here on SA. Some of my favorites include traditional utility giants with a significant and growing exposure

This article was written by

David Ksir profile picture

David Ksir is an ex-Private Equity investment professional with a strong European real estate background, now focused on active investing in US and EU equities. His goal is generating market beating returns with an emphasis on reliable (growing) dividends. He is primarily invested in REITs, Financials and Renewable Energy.

David contributes to the Learn more.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (53)

Ask yourself this question. Where would BEP and the other publicly traded subs be if they were not affiliated with Brookfield? If they did not have the deal flow, financing, third party capital, brand, and leadership?

In other words, what does BEP get in exchange for the fees it pays to Brookfield?

The answer is: a lot. The various Brookfield businesses work in concert, when they make a deal for commercial property it leads to deals in renewable energy and vice versa. The same banks and lenders provide money to all of the businesses, and money raised from institutional investors gets invested in all of the subs.

If BEP tried to establish and grow their business without these benefits they would be at a major disadvantage, and this may explain why there are not other companies like BEP and BIP in the market, they have not been able to get established or grow as fast without a sponsor.

Your analysis is not wrong that a significant percentage of the cream from the returns gets upstreamed to the mother ship but the subs have all done quite well in market terms since inception. The main reason to invest in one sub rather than BAM or BN is to have exposure to a specific market segment, or perhaps to avoid exposure to one such as commercial property.
SmilinJack99 profile picture
@UncleLongHair UNC. Well put!
@UncleLongHair Thanks for the very clear reasoning. I'm long BAM, but also BIP and BEP. One for asset management, one for infrastructure, one for renewable energy. I like the clarity, and the dividends.
@UncleLongHair I respectfully disagree. You don't need brand, financing, sourcing, or leadership (lol) and what not for operating a solar plant. My rooftop solar on my house for example might well have a higher return than BEP. Because my management is much leaner, it doesn't need all that crap and overhead. I'm not making a case or comparison of home solar vs utilities, but a case for the fact that maximizing returns is different from maximizing asset base. There are little to no economies of scale with power plants. Clearly, BN/BAM/BEP are incentivized to maximize the asset base and returns for BN/BAM first and foremost, not returns for BEP unitholders. They managed to harvest the captive capital somehow, and now it's time to squeeze the most juice out of others' capital with limited risk on their own. And hopefully they do it efficiently, because I own BN shares ;)
Ján Mazák profile picture
There's a management fee, too. Roughly, let's say BEP manages to get 15% ROE on its investments. ~350 bps of that goes to incentive fee, ~125 bps goes to management fee, you are left with ~10% return as a LP. Not great. BAM consumes about 30-40% of the present value of the total cash flow of BEP, unitholders only get the rest. It's in line with historical returns: ~5% growth + 3-6% yield.

And I doubt it will be easy to get 15% ROE; solar and other renewables are likely to become rather commoditized or new projects bid up to prices resulting in measly returns (at least in safe countries).
@Ján Mazák Well said; what I've been speculating for years in comments to Brookfield articles that cite investor presentations with idiotic ROE projections. If someone can generate 15% return on capital with some power plant, then sooner or later someone else will pay whatever money it takes to generate 10% returns. Game over for the 15% returns. You don't need to be an expert in the industry; you just need a brain to know that there is no risk-free excess return in the long run.
Should the situation regarding the rise of management fees also be a concern for owners of BIP?
I own shares in all Brookfield companies except for BBU. I was an early investor. I find it interesting that theres not much chatter about their insurance business and subs like Trisura. I’ve tripled my money invested in Trisura. Brookfield managers are some of the best in the business. And yes following the money flows is time consuming and complicated. But I am an investor and not an analyst. I focus on simple things. Am I getting the promised dividends? Are the companies growing and delivering on their financial plans? Do they have sufficient cash or access to it to fund their growth? If so I’m less concerned about inter company flows. It helps to own them all.
I just can't get on board with Brookfield companies anymore...I sold out of BEPC, BIPC, BN, and BAM and converted it all over to BX.
@initforthelonghaul I love BX too. I don't think either way you would go wrong
David Ksir profile picture
@initforthelonghaul what made you bail on Brookfield?
@David Ksir I've owned BEP, BIP, BAM, and BN...the yields are fine, but the appreciation is awful the last few years. I see Brookfields intention with the recent reorganization, but it just isn't translating. I hear the argument of yield, but I'm not willing to put dollars at yield when my capital continues to deteriorate.
I invested $1,000 in BEPC recently. How long should I let it sit, and should I feel concerned about it? This whole thing is mostly experimental to me, at this early stage in my investing life. I looked into BEP, but decided to avoid it for tax reasons. Also considered BAM, but decided against on a hunch. Here's to hoping I made a good decision! :'D
David Ksir profile picture
@MatiasNeedsMoney I wouldn't be overly concerned, the target is still 12-15% annual returns to shareholders. Depends on your strategy. Just understand what you're buying and if you like it, keep it :)
I bought BN in 2013 and added in 2018 - my entire investment is up 12% (plus dividends) to Today - i bought BEP in Oct '19 - that investment is up 58% (with both i have the spinoff as well) - from the day i bought BEP in 2019 BN is down 15% and BEP is ahead 36% - again - both not counting the dividends nor spinoffs - and -the dividends are larger for BEP - i don't think you can take one negative and make an investment decision based on it - certainly with a company like BN that is complex enough to make forecasting harder it is unwise - a holding co - like our own portfolios - will have some winners and some also rans - if you are invested in one of the winners you will in all likelihood be better off than were you in the holding co regardless of fee structure - could work the other way also - the point is that one negative doesn't make an investment decision for me
@terlen I'm not sure how you're calculating your BN returns but everything I've seen says you should be way further up that 12%. In 2013 BN was about $12.50 and in 2018 it was around $22. If you bought in equal portions your cost base would be $17.50 and you'd be up 80% without counting dividends and spinoffs. If you were only up 12%, your cost base would have to be around $28 which is not accurate. I think you haven't accounted for stock splits.
@Celt14 you are right - i just picked the number off my Fidelity Account - something wrong - i will check that - however that doesn't change my point - i wouldn't decide on an investment because of one data point like the fee structure in this case
@terlen True. If the fees are accurately quantified and included into the valuation calculation, the price could still make sense to invest in BEP.
A couple comments. When looking at the fee arrangement associated with BEP should it be compared to other private partnerships in private equity and real estate. These type of hurdle rate then upside sharing arrangements with the GP are common so knowing it BEP is in line with the industry would be helpful. It could also indicate if being a publicly traded entity is there a premium in fees for that characteristic. Your analysis seems to be looking at two separate investment ideas BAM is a different business model than BEP. BAM is an upside driven investment, if BEP gets above its LP investor hurdle rate then the participation increases in percentage. Below that hurdle rate and the participation is at a minimum. One can look at BEP as having some downside protection with a lower upside potential and BAM being the opposite. For this reason are they in fact two separate investment decisions focused on two different risk components of an investor's portfolio.
David Ksir profile picture
@A Thomas Thanks for insightful comments. Yes, these fees are fairly common in these types of structures and I wouldn't say that Brookfield's are particularly inflated compared to peers. The aim of the article is to make investors aware of these fees that are not insignificant. BEP can still make sense for some portfolios, after all 12-15% target is still nice, but I don't think the downward protection you mention outweighs greater 15-20% return potential for BAM.
@A Thomas You can also look at it in a way that BEP has lower upside potential and higher downside risk. There are fixed fees too, not just incentive fees.
Jacob Olson profile picture
Publicly traded partnerships are an anachronism. Most publicly traded partnerships eliminated IDRs years ago. More recently sponsers have been internalizing the partnerships as the seperate public company costs are not worth it.
I also recognized the income sharing approach of the Brookfield entities, but have dealt with it by owning units in BIP and BEP and shares of BAM. That way, I capture the income on both sides. I have stayed away from BN due to its real estate exposure. I prefer to own only specific areas of realty.
scottiebumich profile picture
@Delray Al I would agree with you about their class B and C office building and their current low valuation it is much more attractive today. Class b n c and of their real estate business, and then when you factor in only North America is having office issues you're looking at 5 or 6%. In Europe and the rest of the world where people don't have mcmansions working from home isn't attractive and possible
@scottiebumich I need only about 2 sqm for my desk and my laptop. Like most work-from-home former office workers. I think they have that much space in Europe ;) Actually in Germany for example, typical single family houses are larger than in the U.S.
Shamanski profile picture
I have a pretty good entry on the recent dip.
If BEP can give me the targeted 12-15% annual return with 7+% of that in a distribution, I will be happy.
BAM has a high valuation and the dividend yield is not that incredible so i hesitate to load up unless it dips more.

I like BX for the best overall asset manager, BX is deep state. OWL is an intriguing value play that has been growing their AUM rapidly.
@Shamanski Interesting that you'd mention OWL here. I'm long OWL as well as BAM. But I'm still holding BIP and BEP. I like the (relative) transparency of knowing that BEP is renewable energy, BIP is infrastructure and BAM the asset manager. No BN even though it seems undervalued. Good luck.
@Shamanski How does BAM have a high valuation? At what price would you buy it?
Shamanski profile picture
I believe the multiple is above 20, below 20 would be cheap. Doesn't mean it will happen though.
I have good exposure to asset managers and own a very small amount of BAM already so I am in no rush to jump in.
I love Brookfield, I like their timelines and capital recycling and love both BIP for diversity in assets of toll roads, midstream, ports and tech. Love BEP for its novel power generation, knowing where the growing trend is and where governments encourage investment. They are both quite reasonable set and forget investments.

I look at BN, and I like much of its structure and all the ancillary things like real estate and insurance that are basically included for free. But I like my yield and though the sum of its part should mean considerable capital appreciation, the market doesn’t want to reward it on its own.

That’s where BAM comes in, it is one sweet vehicle of asset light and has a matching yield to BEP and BIP or close enough. It’s growth potential is enormous and yes, then, that would help bring BN up finally.

So those days I only invest in BAM. If I had a second choice it would be BN.
scottiebumich profile picture
@Yakspeare BAM is really quite expensive when you compare it to its competitors (also those also receive carried interest, which BAM won't for 5+ years).
@scottiebumich What competitors are you referring to?
scottiebumich profile picture
@36510 The Blackstone Group, Apollo, KKR, TPG, Onex,
The Quant Investor profile picture
You forgot to cover the additional management fees based on each dollar of market cap beyond a certain level. Pretty sure all the LPs have it as well.
mdfuller_OR profile picture
@David Ksir well put (pun not intended). I realized awhile back (after reading a great BAM analysis here on SA) that the 'spokes' (BEP, BIC, etc) are in place to make the wheel (BAM) money moreso than common shareholders. That's the priority of the spokes. I've sold all common in the wheels, but gladly accumulate preferred offerings at right price / yield and take advantage of that cash flow, just not tied to common (BEP-A and BIPH).
Common Shares profile picture
@mdfuller_OR you know they use the pref market to generate alpha for BN as well right? A lot of their prefs were bought back in at big discounts to par periodically.
mdfuller_OR profile picture
@QAAP yep they’re BN tools for sure, but it’s an easier game to play along with while keeping my toes and fingers compared to common - imho - used to own common and learned my lessons… you know, fool me ….
Common Shares profile picture
@mdfuller_OR panic sold the common?
@David Ksir your article just confirms what I think about the complex structure of (once BAM) BN, BLK and other similarly structured private equity groups. They are comprised of the smartest, best connected and greediest investment professionals on earth and to invest with them is tantamount to riding a tiger. I wouldn’t compare them to ENRON except to say I’ll bet the managing partners of their accounting firms are reluctant to cause waves (cause they are being paid a fortune) and are probably not as smart (certainly not as knowledgeable) as the numerous YieldCo managers. GLTA!
David Ksir profile picture
@Spanishmoss Thanks for commenting! It’s quite complex, no question about it, which is why I really want to be on the same side as management.
scottiebumich profile picture
@Spanishmoss I'm not quite sure I understand why I've been thinks these companies are so complicated start at the top structure look at their balance sheet and then look into each individual security that they own which is a subsidiary and has their own reporting and you could dive in and understand each one separately. Then understand the incentives distributions financing of debt structuring New Deals and it's actually pretty straightforward
Thanks for another great Brookfield read! I'm enjoying your articles! Just waiting BEP to climb another 7 or 8%, so I can break even and sell into BAM as well. Been thinking of doing what you've done for a while, just waiting for the price to be right!
David Ksir profile picture
@GMakdo Happy to help. Always nice to hear good feedback! Good luck with the switch.
What about BEPC?
David Ksir profile picture
@Tino1108 most likely the same thing as shares are supposed to represent the same economic interests as BEP.
@Tino1108 BEPC always sells at a premium over BEP because of general dislike for the partnership hassles and K-1s. Many institutions cannot invest in limited partnerships but like the entity. BEPC's premium is about 8% just now for what is supposedly an identical economic interest in its business. No thanks, going for BAM.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.