The disclaimer at the end of this report is an important disclosure. We encourage all readers to consider it carefully.
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Unlike the first three quarters of the year, BIP does not provide 3-month financial statements when reporting 4Q financial results. Yet, 4Q is an important one for the fund. In addition to often closing acquisitions at the end of the year, the quarter is critical from an accounting perspective: it is the quarter in which management marks its investments to market.
The absence of IFRS financial statements means the 4Q accounting magic takes place just out of view of investors. As the table below shows LP net assets were melting faster than the polar ice caps in the first three quarters of the year. Things reversed in 4Q.
Net asset erosion in the first three quarters of the year should not be surprising. In 2024, LPs paid ~9.1% of NAV in fees to Brookfield. Distributions amount to 14.1% of net assets for a 23.1% cash expense burden for the year.
As the table suggests, there was some important accounting adjustments in 4Q24. In this report, we show how out of sight financial engineering in 4Q24 stemmed NAV erosion and prevented a wholesale collapse in LP net asset value.
On an as reported basis, NAV/unit declined -12.3% in 2024. Excluding our estimate of asset write-ups, it declined -24.1%.
BIP’s asset revaluations are not enough to stop the NAV decline. BAM states that gross returns on its infrastructure funds have been 15% per annum. BIP’s going-forward LP cash expense ratio of 26%, creates a substantial gap that results in eroding NAV. Further, the rate of erosion increases as the equity base shrinks.
Can BIP invest its funds at 15% and pay cash expenses of 26% and survive? All things equal, it cannot.
In our view, BIP must sell units to build equity. At a price/NAV of ~3x, investors will pay $30 for every $10 in assets. It is clear why the deal appeals to management. Investors, on the other hand…
Accounting Magic in the “Unreported Quarter”
BIP has two ways of generating investment returns. The operational performance of the businesses and the sharp pencils of Brookfield accountants. Some aggregate, if of dubious value, operational performance is shown on the income statement. However, a lot of the action takes place on the comprehensive income statement. Investors seldom focus on comprehensive income. Yet, it is where assets are marked to market and the impact of foreign currency fluctuations are reported. The items can have a material impact, as shown in the summary shown below.
We summarized the statement to focus attention on what we believe are the two key accounts on the comprehensive income statement – revaluations and FX.
4Q is an interesting quarter not to report. As indicated, there is an important flurry of accounting actions at the end of the year. To derive 4Q24 numbers, we subtracted the 9-month performance from the full year figures.
Asset revaluation added $1.4B in the quarter. Curiously, FX was a neutral factor until foreign currencies apparently fell off a cliff in 4Q, costing BIP $1.4, almost identical to the asset revaluations. Year-end comprehensive income of $261M was dominated by the $494M of CI produced in 4Q24.
The magnitude of asset revaluations were the key upward driver in equity for the quarter and year.
We produced a similar derived income statement for equity accounted investments, which we show below.
$645M or 81% of annual comprehensive income was produced in 4Q24. The largest part of income in the quarter was $398M of other comprehensive income. Other comprehensive income is where BIP records asset revaluations. Our assumption is that the turnaround from ($37M) for the first 9-months of the year to $361M as of year-end was driven by asset write-ups.
Asset revaluations across consolidated and equity accounted investments saved the partnership from a collapse in net assets.
NAV Without the Write-ups?
We produced a quarterly change in LP net assets to illustrate how accounting augments operational performance to generate equity. We show equity both as recorded on an IFRS basis and adjusted for asset revaluations in 4Q. It is shown below.
BIP’s footnotes indicate that $264M of the revaluation surplus generated in the year was applicable to limited partners. We estimate that $370M of the $398M in comprehensive income for equity accounted investments was asset revaluations for total write-ups of $634M, which is shown as an adjustment.
On an as reported basis, net assets were up +1.4% in the quarter. When asset revaluations are eliminated, net assets plummet -12.3% in the quarter, reflecting substantial FX losses.
In 2024, NAV/unit declined -12.3% on an IFRS basis. Adjusting for asset revaluations, we estimate that NAV/unit declined -24.1% to $8.81 during the year.
The Accounting Wand is not Enough
BIP is entitled to write-up the value of its assets as management sees fit. Asset revaluations in 4Q24 temporarily reversed the erosion, providing some stability. However, the investment return/expense mismatch means that NAV erosion will continue going forward.
The vast majority of assets are owned through BAM-managed funds. According to BAM, its infrastructure funds have generated gross returns of 15% per annum. Therein lies the rub. BIP’s 4Q24 fees annualize at a rate of ~10.4% and distributions ~15.9% for a total cash expense burden of 26.3%.
How does BIP survive with investments in funds with a ~15% returns while paying out 26% annually? All things equal, it cannot.
NAV erosion will accelerate in 1Q25 due to the shrinking equity base. Fund returns are not enough to stem the collapse.
The only way for management to stay the execution is an equity raise or a large acquisition paid for with script. At current prices and a multiple of ~3x NAV, management can manufacture $19.50 of equity per unit sold.
Selling $10 of assets for $30 is a good deal if you can get it. But as Paul Newman once said – “if you are playing a poker game and you look around the table and can’t tell who the sucker is….”
DISCLAIMER
This report represents the opinions of Keith Dalrymple and Dalrymple Finance on Brookfield Infrastructure Partners. It is an opinion piece and should not be taken as investment advice of any kind. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.
BIP’s webpage provides the names of sell-side analysts and firms that provide research coverage. The firms and analysts listed are in the business of providing investment advice to individual and institutional investors. We strongly encourage those seeking investment advice to consult one or more of the sell-side research firms listed.
The report is based on publicly available information and due diligence Dalrymple Finance believes to be accurate and reliable. However, it is presented “as is” without warranty of any kind, whether express or implied. Dalrymple Finance makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. This report contains a large measure of analysis and opinion. It is subject to change without notice.
Following the publication of this report we intend on continuing to transact in the securities. We may be long, short or have no position at any time. That position may change at any time.
We are investors with the goal of profiting from our research. You should assume that as of the publication date, that Dalrymple Finance, Keith Dalrymple and/or affiliates have a position in related securities. We have a vested financial interest in entity discussed in this report.
In no event shall Dalrymple Finance or Keith Dalrymple be liable for any claims, losses costs or damages of any kind, including direct, indirect and otherwise, arising out of or in any way connected with information in this report.
Have you done any follow up work on BIP? Value Line has it listed with a 35 PE and 3.5% return on capital. $65 billion in debt. The structure is so complicated, it makes my eyes water.
In March of 2023, when SVB and others were having trouble, I did a little dive into "held to maturity" vs "available for sale" and learned about bond values and the effect on AOCI. When I look at, say, Bank of America's balance sheet, AOCI is listed in equity. Why isn't AOCI shown on BIP's consolidated balance sheet?