The AI Tailwind Nobody Expected w/ Brookfield’s Anuj Ranjan

0:04Previously on Dry Powder, Anuj Ranjan, Chief Executive Officer of Global Private Equity at Brookfield, explained why AI's most interesting applications may be inside the industrial businesses that Brookfield has long invested in.

0:16Anuj Ranjan: Maybe now we can triple those margins because AI will probably allow us to make our changes faster, but also to make them with more impact. But that may only be half the story. As AI drives demand for power, data centers, and other physical infrastructure, it's also opening up investment opportunities across a whole ecosystem of ancillary businesses and assets. No one would think there would be an AI build-out tailwind to a wire that makes a pipe heat resistant or protects pipes. You know, no one's going to expect that, but that's become a real use case. Today on the show, we'll broaden the aperture to consider the opportunities Brookfield sees across the physical economy.

0:55Anuj Ranjan: The need for power is, I think, immense. That need for compute is immense. But also the need for all the services and all the products that actually fuel that whole industry getting built out is also immense. I'm Hugh MacArthur, chairman of Bain's Global Private Equity Practice, and this is Dry Powder. Anuj, are there any other AI initiatives that you'd call out as early signs on how the physical economy that dominates Brookfield's investment process and philosophy is about to change? I think the world is still underestimating the amount of infrastructure and power required to do all of this. There's often debates on how much infrastructure, how much power do you need.

1:45Anuj Ranjan: I don't think it's anywhere near that stage where we've got enough. And the compute use cases are only increasing. If you think about your iPhone, a battery in an iPhone 10 years ago is very different than a battery today. But I can tell you we're also draining our batteries every day today. So the amount of processing power we have in our phones today gets consumed because we're doing more with our phones. That's the same thing that's going to happen with AI. We're all going to be doing more with it, and that will be drawing more and more compute. And so the need for power is, I think, immense.

2:21Anuj Ranjan: That need for compute is immense. But also the need for all the services and all of the products that actually fuel that whole industry getting built out is also immense. We own a business called Chemillax. It makes heat tracing equipment that is like a wire that wraps a pipe, and it temperature controls whatever goes within it. So whether it's a pipeline or whether it's a chemicals factory or a water utility or underfloor heating, these are all various applications. I mean, the New York City subway system is wrapped in it. The Eiffel Tower is wrapped in it. We protect pipes. The amazing opportunity that wasn't an opportunity two years ago in this business was protecting data centers.

3:04Anuj Ranjan: And so this business is growing dramatically on the back of all of the work we're doing around data centers and the build out of that space. So it's the actual infrastructure that is booming, of course. But what I think is often the opportunity that gets missed is the surrounding ecosystem that people don't think of. No one would think there would be an AI build-out tailwind to a wire that makes a pipe heat resistant or protects pipes. No one's going to expect that, but that's become a real use case. So when we look at businesses, we're always thinking about their other various applications. And this is where, again, being part of Brookfield, we can buy a business that didn't have any exposure to that space before.

3:51Anuj Ranjan: And very quickly, we can build divisions within the business that go after new customers that are in that universe and add significant fuel to that business's growth. Where else are you seeing interesting opportunities in the physical economy today? What kinds of themes are you thinking about? You know, we're often thinking about, obviously, supply chain resilience. I'd say, you know, movement of supply chains and how people procure their goods, not only to the United States, which is a very common thing that people talk about, but this is happening all over the world. You know, supply chains are moving closer to home.

4:25Anuj Ranjan: And it's not because of tariffs alone. We've seen this trend since the pandemic. The net new investment in US manufacturing is up almost five times since 2020, but it's gone up effectively sort of a straight line in that period. And the same kind of trend is happening in Asia and the same kind of trend has been happening in Europe. And so that trend is throwing out really interesting opportunities as manufacturing bases come back home. For one, it requires capital. It requires CapEx. But two is it creates opportunities to invest in companies that maybe could not do it for all of their products and therefore need some help or partnership or need to offload a business that isn't a core business for them.

5:12Anuj Ranjan: We bought a company this year that is the world's largest manufacturer of corrugators, which are the big machine the size of a boardroom that go in a box plant that make cardboard. So cardboard is going to be used forever or at least for Amazon packages. Because cardboard itself is a bad business, but there's only two companies on earth that make the actual corrugator machine that goes in this box plant. One of them was Italian company. It's about 50 % market share of the whole world. 70 % of its sales are to the US. It was owned by a Chinese conglomerate. And so the complexity of a Chinese conglomerate owning a business in Italy where there have been some cases of golden share to the Italian government of a Chinese-owned business and things like that, which sells all of its product to the US, that was too complex for most people to get their head around in our current world.

6:08Anuj Ranjan: We put our China team on it, our European team on it, our US team on it, and we just thought, cut through all the noise, 50 % of all corrugator machines in the world are made by this one company. It's the market leader. And every time you install a corrugator, you service it for 25 years. And no one else can service it because only two companies on earth make it. so you effectively have a high margin aftermarket tailwind in this business cardboard I don't think is stopping anytime soon let's cut through the noise forget about the fact that it's Chinese owned forget about the fact that it's headquartered in Tuscany forget about the fact that it may have to deal with tariffs because a lot of its sales are to the US let's work to figure out how to buy this company we were able to acquire the company at a great multiple about eight and a half times And since then, we've been able to run the business.

7:02Anuj Ranjan: It's very early, but it's going very, very well so far. It was effectively bought bilaterally because we knew the business and other people found it too complex. That's a great example of cutting through the complexity, using your global knowledge and really figuring out where there's risk and where there isn't if these machines aren't going away. And it also, by the way, provides a wonderful opportunity to have some delightful business lunches and dinners in Tuscany with lovely wine to discuss the business. I have to say, we have a program at Brookfield, and this predates my time here, predates my 20 years.

7:37Anuj Ranjan: We have a program at Brookfield where once you're a VP, before you can become an SVP in the organization, you have to have done a one-year tour of duty in an actual portfolio company or in an operating role. These are not easy assignments. So we take people working in New York City, and we tell them they have to move to Kansas City or they have to move to Toledo. Everybody has to do it. We call it going from the spreadsheet to the shop floor. We think it makes our people incredible investors. But the first time we had a lineup of volunteers was when we bought this company headquartered in Tuscany.

8:11Anuj Ranjan: Suddenly, everybody wanted their one-year assignment. So it's, yeah, every once in a while, we get a good assignment. it. Well, no offense to Toledo whatsoever, but if it's Toledo or Tuscany, I know which one I'm choosing. I would go back there in a heartbeat. There you go. There you go, exactly. And tied to that, I'd say, you know, with various geopolitical events in the world, it's accelerating how people think about where certain products will be sold and certain products will not be sold. And, you know, and navigating that in this environment is a lot more complex. Right, no, that totally makes sense.

8:45Now, I spend a lot of time talking about this topic, but I think our audience would love to know, Anuj, how you would describe the fundraising environment for private equity today, what you're seeing out there, and how it's affecting the way you think about investing and building the business inside of Brookfield.

9:01Anuj Ranjan: Yeah, it's a great question. Look, private equity fundraising is hard. I would say most clients of private equity have either slowed down or are pulling back from their private equity investments. It's a combination of factors. There hasn't been a lot of return of actual dollars from private equity funds to their LPs. So that's been one part of it. Two is the public equity markets have been very strong. And so sometimes there's a question over, well, do we allocate more to private equity or do we allocate more to public markets that some of these institutional clients have? And third is there's a recognition that we're no longer in a zero interest rate world with effectively zero inflation.

9:43Anuj Ranjan: We're in a world that has higher inflation and higher interest rates, and it's probably here for some time. And while people like to say higher for longer or aren't interest rates so high, I mean, arguably, if you look back fully over history, these are actually normal rates. It was an aberration probably that for 15 years, we had very low rates and that changed what the private equity world was. In a higher inflation rate, interest rate environment, you cannot just count on growth. You can't just count on multiple expansion. You can't just bet thematically that something's going to grow. Private equity has to roll up their sleeves and actually run businesses better to generate returns.

10:24Anuj Ranjan: So I think everyone's stepping back and reassessing their private equity portfolios and therefore, more or less, the private equity fundraising environment's been challenged. That's just generally speaking. That being said, what we're seeing, and I think it's true for many groups, clients are doing two things. They're picking groups who they believe have deep expertise in an area and have the operating capability to actually put that expertise to work in businesses that they own in that space. And so they're looking for sector experts who know how to run that type of business better than anyone else in the world.

11:03Anuj Ranjan: In addition, they are trying to do more with fewer partners. And so they're prioritizing groups where they have a much broader multifaceted relationship. Because that will mean that they frankly will probably get better treatment. And maybe they'll even have lower fees. And that makes their net returns all the much better. And so when you take those two things together, working with groups who they have broader multifaceted relationships and picking groups who are inch wide, mile deep. It's both been playing to Brookfield's advantages. So we have benefited from being part of the Brookfield ecosystem where many of these clients, we manage their infrastructure money, their real estate money, their energy money.

11:47Anuj Ranjan: And now it's very easy for them to say, we'll work with you in private equity as well. In addition, I think they've recognized that we've got very deep operating expertise and capability in our universe of industrials and heavy asset services. It does help that those two areas happen to be where I think a lot of capital wants exposure today. A lot of capital providers have realized that they are probably under allocated to industrials and under allocated to heavy asset services versus, let's say, technology and software in the past. And so with all of those kind of things coming together, I mean, we're raising our largest fund ever.

12:26Anuj Ranjan: And we're raising it faster than we ever have in the past. So for us, it's led to quite a bit of success. And so we're having a very positive fundraising experience. But I wouldn't say that that is how the whole market is experiencing it today. Right. Most certainly not how the balance of the market is seeing fundraising today. So when you look five or 10 years out, I've heard you talk about power-related businesses, data center-related businesses, other businesses that you quote unquote can't tip over. Where do you see some of the most interesting opportunities for Brookfield's private equity business?

13:00And we just kind of take that crystal ball and look out a few years. What are you thinking about?

13:05Anuj Ranjan: You know, I think the United States is still one of the best markets in the world and is growing. It's one of the few markets in the world that's got real scale and real growth and an ability with an entrepreneurial class to pivot and embrace new things, including this technology. And so the market we're most excited about is the US, and that's where we've been putting most of our capital to work. We have continued to invest in Europe, where we find global businesses in Europe. The European markets are a bit slower, but there are some global champions that you can acquire out of Europe that are actually sometimes providing the majority of their services and products to the US or other markets.

13:46Anuj Ranjan: They happen to be housed in Europe, and that's been quite exciting. And Asia, again, for us, It continues to be a place that we look at opportunistically where we still do find some growth in certain pockets. But all of it is back to our same themes of industrials, heavy asset manufacturing, heavy asset services, businesses that provide an essential product or service and that are under digitized that allow us a lot of opportunity to transform them. And I'd say that theme that we've been focused on has been working very well. I continue to be really excited about that going forward. Any other areas of the market you think investors could be overlooking?

14:25Anuj Ranjan: You know, an area that we continue to lean in on is what we call financial infrastructure. And this is asset-light financial services that enable the movement of money around the world, particularly digital money. And I think, you know, AI gets a lot of the headlines. But similarly, what's happening around central bank-backed currencies, stablecoins, other forms of digital tokens, we're not so fussed about the actual, I'll call it the commodity being moved. But the pipes on which it's moving, that enablement layer, the on-ramps, the off-ramps, the payments, the ability to take digital currency and make it really usable, I think that's an area that's really, really ripe for transformation.

15:15Anuj Ranjan: There's a really a lot of exciting things happening there. If you think about it, cash money, physical money, it's shocking that it's still around. Right. And the technology's there. So it's not because of the lack of the technology. It's customers being comfortable with it in a digital form. But all of that, I think, is coming. And we've been investing a lot behind what we call that infrastructure sort of layer to empower all of this movement and benefit from all of it. That is kind of a different business than we've been talking about. And it's clear that while we've been saying, you've been saying boring businesses, the businesses that Brookfield has been investing in are anything but boring.

15:57And as the platform continues to grow, the question that naturally forms in my mind is how do you preserve the advantages that made it so successful in the first place amidst all of this change?

16:08Anuj Ranjan: Yeah, you know, it's funny. The world is changing a lot today, but we benefit from some people at Brookfield that have been around for ages that remind us that there was times before our current time where the world was changing very fast as well. You know, and crises that happened in the 70s, crises that happened in the 90s. I mean, in the world of finance and the world of investing, I think we're never short of exciting times or opportunities for things to have a lot of volatility. So I think that that learning, it all comes on a culture of an organization. And we have a few key philosophies that we adhere to as an organization that we have done for the 150 years that we've been in business.

16:55Anuj Ranjan: And so it's stood the test of time. It's stood the test of different leadership. And it sounds really simple, but you try to invest where you have differentiated knowledge, differentiated operating capability, and where you can take a long-term view in what is fundamentally a good quality business. Of course, you'll make mistakes. But broadly, I mean, the world has kept changing many times in the past. It will keep changing. Things will keep surprising us. and good businesses with good people stand the test of time. That's kind of been our philosophy. And sometimes it does take leadership who have been around for a long time and been through all of these different sort of market environments or cycles to remind us of that so that we do stick to our knitting and we do focus on the areas that matter.

17:51Well, Anuj, this has been a terrific conversation. And I think the audience has learned a heck of a lot and I've learned a tremendous amount during this conversation about what differentiates Brookfield and your journey and the kinds of things that are exciting you. And it's fairly unique. And it's unique at a massive scale in the industry. So it's a terrific conversation. And I wanted to thank you very much again for appearing on Dry Powder.

18:14Anuj Ranjan: Thank you so much. Thank you, Hugh. Appreciate the time.

18:21I'm Hugh MacArthur. Thank you for listening.

18:28Thank you.