Brookfield strikes deal with debt firm Castlelake in drive to expand credit business

Castlelake will still operate independently and retains majority ownership of its earnings

Author of the article:

Bloomberg News

Michael J. Moore

Published May 06, 2024 • Last updated 17 minutes ago • 2 minute read

Bruce Flatt, chief executive of Brookfield Assest Management Inc., speaks during a Bloomberg Television interview at the Milken Institute Global Conference in Beverly Hills, Calif. on Monday, April 29, 2019. Photo by Patrick T. Fallon/Bloomberg

Brookfield Asset Management Inc. struck a partnership with Castlelake LP to get a majority share of the private debt firm’s fee-related earnings, another move in the Canadian investing giant’s effort to grow its credit business.

Brookfield Asset will invest about US$1.5 billion, including money that the firm’s reinsurance arm will place in Castlelake’s strategies, the firms said in a statement Monday. Castlelake will still operate independently and retains majority ownership of its earnings tied to performance.

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Toronto-based Brookfield Asset recently formed a credit arm to drive growth alongside its traditional real estate and infrastructure funds. It’s looking to manage more credit assets for insurers, including its own, and has turned to partnerships in many instances.

The Castlelake deal “helps to deploy some of its significant cash (US$2.7 billion) on its balance sheet and we think there could be an opportunity to take a greater stake in Castlelake over time,” RBC Capital Markets analyst Geoffrey Kwan said in a research note.

Brookfield shares were up 1.2 per cent in New York in early afternoon trading.

The company also has partnerships with Oaktree Capital Management — in which it acquired a majority stake in 2019 — as well as European credit manager LCM Partners, Primary Wave and 17Capital.

Alternative-asset managers have been pushing into areas beyond traditional buyouts as rising interest rates have made borrowing more expensive. That’s led to a boom in private credit, which jumped in to fill a lending void as traditional banks retrenched. Private equity firms have also been buying stakes in insurers to influence how they invest and grow their balance sheets.

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Brookfield Asset expects credit to be its fastest growing business, more than tripling in size over the next five years. The firm is partly relying on credit — including its insurance business — to reach US$1 trillion of fee-bearing assets by 2028, up from US$457 billion at the end of last year.

Its credit arm also runs investment strategies including so-called insurance solutions, such as investment-grade debt, structured finance and asset-backed financing. But private credit and direct lending remain the biggest part of the business, accounting for 80 per cent of fee revenue last year.

The Castlelake deal is another example of how alternative asset managers are slicing up their different drivers of profit, with fee-related earnings seen as more stable and tied to attracting assets, while performance windfalls — or so-called carry — are potentially lucrative but less predictable. Several large firms have tweaked their pay structures in recent months to give shareholders a larger slice of fee-related earnings and employees a bigger chunk of performance gains.

Castlelake, founded in 2005 by Rory O’Neill and Evan Carruthers, manages about US$22 billion, focused on asset-based private credit including aviation and specialty finance.

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