Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Risk Disclosures
BAM has limited activities and operations. BAM’s exposure to market, foreign currency, interest rate and credit risk is driven by its equity interest in our asset management business. There have been no material changes to BAM’s financial risk exposure or risk management activities since December 31, 2023. Please refer to Item 1A of this report for a detailed description of BAM’s financial risk exposure and risk management activities.
Market Risk
The primary market risk exposure of our asset management business relates to its role as an asset manager of the publicly listed permanent capital vehicles and the sensitivity of base management fees earned from these affiliates due to movements in their underlying trading price. Specifically, with respect to the market risk related to base management fees earned based on the market capitalization of BEP, BIP and BBU.
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The table below outlines the impact to base management and advisory fee revenues if there was a 10% decline in the market capitalization of the aforementioned permanent capital vehicles:
FOR THE YEARS ENDED DECEMBER 31,
(MILLIONS)
2024 2023 2022
BEP $ 20 $ 22 $ 19
BIP 33 32 33
BBU 7 4 7
Revenues $ 60 $ 58 $ 59
Foreign Currency Risk
We have very limited exposure to foreign currency risk as a majority of our private funds are denominated in USD. This means that a majority of the Fee Revenues that we earn are paid in USD, irrespective of the local currency of our underlying investment base. Additionally, the majority of our revenues are earned in the U.S.
Interest Rate Risk
BAM has interest rate exposure through balances held with affiliates and does not hold debt or term deposits with third parties. BAM incurs interest expense on its revolving credit facility borrowings with the Asset Management Company at variable rates. In fiscal 2024, a 50 basis-point increase (or decrease) in interest rates, with all other variables held constant, would have resulted in an approximate increase (or decrease) of $1.1 million in interest expense. Assuming December 31, 2024 year-end balances remain constant throughout 2025, a similar 50 basis-point change in interest rates would result in an approximate increase (or decrease) of $1.1 million in interest expense.
The Asset Management Company has interest rate exposure through balances held with affiliates, as well as its internal revolving credit facility with BN and its external revolving credit facility which is currently undrawn. The Asset Management Company earns interest income on its deposit balance with BN and as the lender on the revolving credit facility it extends to BAM. The Asset Management Company incurs interest expense on its revolving credit facility borrowings with BN. Interest income and expenses on these balances are at variable rates. In fiscal 2024, a 50 basis-point increase (decrease) in interest rates, with all other variables held constant, would have resulted in an approximate increase (decrease) of $7.4 million in net interest income. A 50 basis-point increase (decrease) in interest rates would result in an approximate increase (decrease) of $1.8 million in net interest income assuming December 31, 2024 year end balances remain constant throughout 2025.
Credit Risk
Investors in our private funds make capital commitments to these vehicles via subscription agreements. When a private fund makes an investment, these capital commitments are then satisfied by our investors via capital contributions as prescribed under these subscription agreements. Investors in our private funds may default on their capital commitment obligations, which could have an adverse impact on our earnings or result in other negative implications to our businesses such as the requirement to deploy our own capital to cover such obligations. This impact would be magnified if the investor that does so is in multiple funds. Given the diversity and creditworthiness of our over 2,300 clients, including some of the world’s largest institutional investors, sovereign wealth funds and pension plans, we are of the view that there is not a material credit risk present in our asset management business.
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