What should NZers know about Brookfield?

The biggest investor announced for this week's Infrastructure Investment Forum has a history of questionable tax practices that NZers should be aware of...

This week a coterie of Chrises (PM Luxon, Infrastructure Minister Bishop and presumably Building Minister Penk) will be welcoming some big name investors, pension funds, and construction companies to Auckland to try and flog off some big ticket public-private partnership deals. The $10 billion Northland Expressway is top of the list (although the list is understood to be only four projects).

Last month pundit Matthew Hooton characterised the summit as

the single most important personal initiative Christopher Luxon will take in his year of economic growth. His reputation – and, more importantly, New Zealand’s credibility as a place to invest money – depends on its success.

The NZ Herald has published a list of attendees, which, by my count includes 38 investors and pension funds. 18 are from New Zealand, and a further 8 from Australia. Don’t get me wrong, I’ve organised talks before and been stoked when there are 12 people in the room that I haven’t met before, but I think the stakes here are a little higher.

Big players missing in action?

On first scan it looks like Blackrock, the world’s largest asset manager with US$11.5 trillion (NZ$20.2 trillion) in assets under management, hasn’t accepted the PM’s invitation to attend, which, given Ardern secured facetime with Blackrock CEO Larry Fink, could speak to his credibility in the business world. But it’s not as simple as it seems.

Blackrock are, for example, the largest shareholders of the Aussie parents of our Big Four banks, as well as holding large gentailer shareholdings. They’re better known in NZ for a $2 billion decarbonisation fund secured towards the end of the last Labour term, although when last checked that fund was yet to invest a single cent. More recently, the US private equity giant left a sour taste in Kiwis’ mouths late last year after they pulled the pin on SolarZero, NZ’s largest residential solar retrofitter.

However the only US investor in the list - Global Infrastructure Partners - was in fact acquired by Blackrock in January 2024 for $12.5 billion. GIP have been leading the charge for Blackrock in bringing the Panama Canal back into American ownership (whatever the hell that means, given both the seller - CK Hutchison Investments - and the buyer - GIP Fund V - are registered at the same Cayman Islands address, the notorious Ugland House).

Blackrock’s other big brothers in arms, Vanguard and State Street - together the “Big Three” of asset management who target shareholdings on all large public companies across the world as well as private equity, real estate and infrastructure investments - are also missing in action. As are the big Middle East sovereign wealth funds, who were always going to struggle to attend in the middle of Ramadan.

Locating Brookfield

The biggest investor attending is Canadian Brookfield Asset Management, which oversees more than US$1 trillion (NZ$2 trillion) in assets under management. It will be relatively unknown to New Zealanders, although it has held some NZ assets (this is a non-exhaustive list):

• In 2019 it partnered with Infratil to purchase Vodafone NZ (now One NZ) from the British Vodafone Group plc, but sold its shareholding to Infratil in June 2023.

• In 2007 Brookfield acquired Australian engineering and construction contractor Multiplex, whose NZ unit delivered NZ projects like the Sylvia Park shopping centre and the Pegasus Town development. It was placed into external administration in 2011 while facing significant uncollectible debts, and was soon met with concerns over a distribution made while insolvent and a lawsuit from Kiwi Income Property Trust over alleged defects at Sylvia Park.

• BGIS New Zealand, which is involved in facilities management and project delivery, was owned by Brookfield (i.e. Brookfield Global Integrated Solutions) from 2015 to 2019, when it was sold to CCMP Capital Advisors.

These are however mere rounding errors in the grand scheme of Brookfield. London’s Canary Wharf and New York’s Manhattan West are amongst the more than 200 office building and shopping malls it has dotted across the planet, and that’s just the start.

Brookfield specialises in “alternative asset management”, which means they tend to focus on things like real estate and infrastructure investment instead of stocks and bonds (although they do have rather a lot of these). In practice, this has often meant acquiring privatised state assets.

Brookfield’s tax concerns

Brookfield’s tax practices have been the subject of significant discussion to date.

A 2017 investigation in the Toronto Star on large Canadian corporations using complex loopholes and corporate structures to avoid tax found that Brookfield among the worst offenders, with an effective tax rate of only 6.7 percent.

A 2022 report by Canadians for Tax Fairness (CT4F) estimated tax gaps (the difference between taxes paid and the amount that would be paid if the statutory rate were applied to reported profits for Canada’s 123 largest corporations). It found that the “largest tax gap for 2017 to 2021 belonged to Brookfield Asset Management”.

A subsequent 2023 report by CT4F on pandemic subsidies noted that Brookfield had tax rates of 5.2% in 2021, down from 6.8% in 2020, but up from 5-year averages over the previous 15 years of 3.9%, 5.1% and 4.9%.

A 2023 report by the Centre for International Corporate Tax Accountability and Research (CICTAR) noted “a heavy reliance on offshore related party debt to reduce income tax obligations where profits are earned, and shift interest income offshore or into other tax-free structures.” Many of its key subsidiaries are incorporated in tax-free Bermuda, as well as others in the Cayman Islands, British Virgin Islands, Gibraltar, Luxembourg and so on.

A detailed case study in that report looks at Brookfield’s ownership of Healthscope, Australia’s second-largest private hospital operator, which it acquired in 2019. Its ownership is structured via the Cayman Islands (incidentally the same address as both sides of the aforementioned Panama Canal sale, Ugland House).

The report notes that:

In the most recent (2020-21) corporate tax disclosure data from the Australian Taxation Office (ATO), the parent company of the Healthscope group, ANZ Hospitals Topco Pty Ltd, ranked 163rd of all companies in Australia in terms of total income, at AUD$2,336 million, but had zero taxable income and paid zero tax. Healthscope’s annual financial statements, filed with the Australian corporate regulator, report AUD$7,603 million in revenue in the past three years. Over the same period, net profit totalled only AUD$24.8 million, while Healthscope claimed AUD$46.1 million in tax benefits.

The CICTAR report notes that this is at odds with reporting from the Healthscope’s Bermuda parent company, which notes adjusted EBITDA of $69 million in 2021 and $64 million in 2022.

More recently Healthscope have been making headlines for imposing new “hospital facility fees” of up to A$100 just for entering a Healthscope facility, and ripping up contracts with private health insurers. Private Healthcare Australia CEO Rachel David said

“This is another unethical tactic from a $1 trillion North American private equity firm that appears intent on holding health fund members hostage, while also trying to bully health funds into paying them more so they can increase their profits.”

These warnings from across the ditch are important, especially given strong suggestions about a growing role for the private sector in our health system.

There are also indications that these practices have impacted Brookfield’s social licence in Australia (although it does sponsor some pygmy hippos at Taronga Zoo).

Pygmy hippo Lololi was born last year.

Renewable energy

Brookfield recently lost a high profile bid to acquire Aussie gentailer Origin Energy for (a lowball) A$18.7 billion, despite a stated plan to more than double its renewables pipeline. In an unusually frank statement, current 17-percent pension fund shareholder AustralianSuper noted that it is:

“resolute [that] the value and future value of Origin is better in the hands of AustralianSuper members and other shareholders than a private equity consortium planning to shortchange them.”

Another May 2024 CICTAR report focuses on Brookfield’s acquisition of Colombian energy company Isagen after its 2016 privatisation. Soon after the company experienced a huge increase in the distribution of dividends and half-decade a collapse in capital expenditure (this will be an eerily familiar story for Kiwis), taking advantage of surging electricity prices to reap windfall profits.

In addition, Isagen took on enormous related party loans to four Bermuda-based Brookfield subsidiaries, resulted in a large increase in interest payments. The report suggested that

There is a strong indication that the structuring of ISAGEN's debt may be part of a strategy to decrease cash availability in Colombia and therefore taxable income. Payments of these loans reduce tax revenues where the income is earned, producing taxfree income offshore. Put simply, this appears to be a form of profit shifting that both limits demands for worker remuneration and avoids income tax payments in Colombia.

And, despite Brookfield’s stated focus on renewable energy infrastructure, a December 2023 report by Private Equity Climate Risks notes that

“Its current fossil fuel investments emit nearly 159 million metric tons of CO2 equivalent (CO2e) a year, much of that through its ownership of Oaktree Capital, a private equity firm with $183 billion in assets. This emissions figure is nearly 14 times higher than the figures Brookfield discloses in its most recent sustainability report…”

The move to insurance

A comprehensive Financial Times investigation published last Sunday (reprinted here without the paywall) raised concerns around recent real estate transactions, like the sale of a stake in One Liberty Plaza from one arm of Brookfield to another:

One of the world’s largest and most complex financial conglomerates, Brookfield sold property to itself like this dozens of times in 2024, using US$1.4 billion from its insurance arm to finance transactions that supported its “distributable earnings” — a non-standard measure of profit that underpins the corporation’s US$90 billion stock market valuation.

These earnings were then recycled back into the portfolio in a circular flow of cash that is attracting scrutiny of both the relative opacity of Brookfield’s accounting practices and how it juggles its vast global portfolio of real estate.

Dimitry Khmelnitsky, head of accounting at Veritas Investment Research, is critical of both the financing and the accounting.

“Brookfield is using their own related party insurance companies as a vehicle to offload assets, during what seem to be challenging markets, and at relatively high valuations,” he says.

As the pandemic and move to work-from-home revolution damaged returns in their historical home turf - commercial property markets - private capital giants like Brookfield, Apollo and KKR have increasingly adapted by moving into the insurance sector.

Brookfield Reinsurance, for example, has purchased a number of major American insurers in recent years, including the US$5.1 billion acquisition of American National in May 2022 and the US$3.4 billion acquisition of American Equity in May 2024.

The FT investigation observes that not only have those companies’ capital & surplus - “what is left when total liabilities to policyholders are deducted from the assets that back those liabilities” - shrunk, but at the same time…

American National has been used to finance other parts of the conglomerate. It declares US$7.7 billion of so-called affiliated assets: investments in other Brookfield operations.

In some cases, they include unusual assets for an insurance company to hold, such as a large stake in Primary Wave, the music royalty business that owns the copyright to Whitney Houston’s “I Wanna Dance With Somebody (Who Loves Me)”.

I’d love to see a corporate tax analysis on these uses for captive reinsurance companies…

Is this the best we can do?

I’m sure there are great examples of solid relationships that have been formed with foreign investors at these kinds of meetings, and this week’s summit may indeed be the beginning of some of those.

But it’s important we quantify the risks as well. Lobby groups are already pushing for concessionary tax breaks on infrastructure and a more lax approach to profit shifting on these projects. Investors attending the summit will be looking for a deal. Are taxpayers ready to subsidise it?

The higher cost of borrowing on private capital markets means PPPs face inherent headwinds when competing with Treasury financing. This debt will almost always be more expensive. At the same time, NZ Treasury bond issues in recent times have tended to be pretty heavily oversubscribed, meaning there is a real appetite for our debt. Why pay more?

There are, however, sources of untapped private capital in NZ right now. We’ve seen residential lending starting to ramp up again, at the same time that residential building remains in decline. Speculators, not developers, are borrowing.

Our tax settings continue to incentivise unproductive investment bidding up the price of our existing housing stock. Until we get this sorted we’ll forever be sitting ducks for foreign investors wanting to make a quick buck, knowing we’re willing to starve ourselves of funding options.

What a great negotiating partner we must be.