Executive Summary / Key Takeaways

• A Proven Capital Recycling Engine: Since its 2016 public debut, BBU has generated over $6 billion from monetizing more than 20 businesses at a 3x multiple on invested capital and 30% IRR, validating a strategy of acquiring essential businesses, operationally transforming them, and redeploying capital at superior returns.

• Strategic Flexibility Through Creative Monetization: The recent Clarios upfinancing ($1.2 billion distribution while retaining full ownership) and the partial sale of three businesses to Brookfield's evergreen fund (at an 8.6% discount to NAV) demonstrate BBU's ability to crystallize value without losing long-term upside, providing $2.9 billion in pro forma liquidity for accretive buybacks and growth investments.

• AI-Driven Operational Inflection: Across its industrial portfolio, BBU is deploying AI, automation, and digital capabilities to drive margin expansion—Clarios' order intake optimization saves millions in penalties while improving service levels 14%, and CDK's AI virtual assistant increases sales calls per lead by 47%, creating durable moats in traditional businesses.

• Significant Valuation Disconnect: Trading at $35.62 with a market cap of $3.16 billion, BBU trades at approximately a 50% discount to management's view of intrinsic value and just 0.11x sales and 2.19x free cash flow, offering compelling upside as the corporate structure simplifies and the discount narrows.

• Key Variables to Monitor: The investment thesis hinges on successful execution of AI initiatives to drive margin expansion, effective mitigation of tariff impacts on industrial operations, and the pace of capital recycling to close the valuation gap while managing leverage at 2.84x debt-to-equity.

Setting the Scene: The Industrial Transformation Platform

Brookfield Business Partners, founded in 2016 and headquartered in Bermuda with significant Canadian operations, represents a unique public vehicle for accessing Brookfield Asset Management (BAM)'s global private equity capabilities. Unlike traditional private equity firms that operate as fund managers, BBU takes direct ownership stakes in market-leading essential businesses across three segments: Industrial, Business Services, and Infrastructure Services. This structure matters because it aligns public investors directly with the economics of operational transformation rather than just fee income.

The company's playbook is methodical: acquire high-quality, market-leading providers of essential products and services, deploy operational expertise to transform them into global champions, and continuously recycle capital to compound long-term value. This approach targets 15-20% returns on investment by focusing on businesses with durable cash flows and clear optimization opportunities. The strategy's effectiveness is evidenced by the $6 billion-plus realized from over 20 monetizations since inception, delivering a 3x multiple on invested capital and 30% IRR—metrics that place BBU in the top tier of value creators.

BBU operates in a competitive landscape dominated by mega-funds like Blackstone (BX) ($1.26 trillion AUM), KKR (KKR) ($723 billion), Apollo (APO) ($908 billion), and Carlyle (CG) ($474 billion). While these peers leverage scale for deal sourcing and fee generation, BBU's differentiation lies in its hands-on operational approach and permanent capital base. The company doesn't just buy businesses; it transforms them through 100-day plans, transformation offices, and systematic technology deployment. This matters because it creates value that transcends financial engineering, building durable competitive moats in industries where operational excellence drives pricing power.

The current environment presents both opportunities and challenges. Global trade tensions, tariffs, and geopolitical conflicts have introduced uncertainty, but they also accelerate trends toward relocalization and supply chain resilience that favor BBU's North American and European industrial footprint. The company's businesses—ranging from Clarios' advanced energy storage to DexKo's engineered components—are essential to the functioning of modern economies, providing defensive characteristics while offering exposure to secular growth trends like vehicle electrification and digitalization.

Technology, Products, and Strategic Differentiation: The AI-Enabled Industrialist

BBU's technological differentiation doesn't come from inventing new software platforms but from systematically applying AI, automation, and digital capabilities to transform industrial businesses. This approach creates measurable economic impact that flows directly to EBITDA margins and competitive positioning.

At Clarios, the advanced energy storage operation, AI-driven order intake optimization has delivered millions in savings from customer service penalties while improving quantity fulfilled by 10% and overall service performance by 14%. Robotics implementation in manufacturing facilities enhances operational effectiveness, while the Connected Services business combines AI and machine learning to reduce unnecessary engine idling by 40% for heavy-duty fleet operators, generating over €1,000 in annual fuel savings per vehicle. This matters because it transforms a traditional battery manufacturer into a technology-enabled solutions provider, supporting margins that exceed 20% and continue expanding despite global automotive production headwinds.

DexKo, the engineered components manufacturer, demonstrates how operational optimization creates resilience. Despite weak market conditions, DexKo has increased margins approximately 200 basis points since acquisition through cost structure optimization, market position strengthening, and productivity initiatives. Management notes the business is "performing well in an improving but still challenging market" with volumes up year-over-year and EBITDA growing low double digits. The company's sourcing and manufacturing footprint positions it better than most competitors to manage tariff impacts, providing a structural advantage that supports pricing power when competitors face margin pressure.

In Business Services, CDK's deployment of AVA (Artificial Intelligence Virtual Assistant) provides quick conversational responses in 50 languages, schedules appointments, and has increased touch points per lead by 4x while boosting sales calls per lead by 47%. This technology modernization requires significant investment—costs are elevated for 12-18 months—but management expects benefits to flow through next year as churn stabilizes and margins improve. The strategic shift from legacy software to AI-enabled platform creates switching costs that protect market share while enabling premium pricing.

Scientific Games (LNW), the lottery services operation, is scaling digital capabilities to capture the nearly $100 billion global lottery ecosystem. As the largest digital lottery provider globally, the company is winning significant contracts including in the U.K., where digital services are expected to go live early next year. While hardware deliveries have been slower than expected, the digital transition creates higher-margin recurring revenue streams and positions the business for long-term growth as lotteries modernize.

Chemelex, acquired in early 2025, has already implemented a transformation office, 100-day cost savings plan, and new go-to-market strategy. AI and machine learning enhancements to its primary production facility are expected to increase throughput, reduce labor costs, and improve product lead times. This rapid operational intervention demonstrates BBU's ability to create value quickly in carve-out situations.

Financial Performance & Segment Dynamics: Evidence of Execution

BBU's third-quarter 2025 results provide clear evidence that the operational transformation strategy is delivering despite macroeconomic headwinds. Adjusted EBITDA of $575 million compared to $844 million in the prior period reflects lower ownership in three businesses following the evergreen fund transaction and reduced tax benefits ($77 million versus $296 million). However, excluding these items, underlying adjusted EBITDA was $512 million compared to $501 million in the prior period, demonstrating resilient operational performance.

The Industrial segment generated $316 million in adjusted EBITDA, down from $500 million in Q3 2024, but increased 17% over the prior year including tax benefits. This growth was driven by higher volumes and growing demand for higher-margin advanced batteries at Clarios, where operational and commercial improvement initiatives continue to bear fruit. DexKo increased adjusted EBITDA on a same-store basis, reflecting higher volumes from recent customer wins, commercial actions, and optimization initiatives that supported resilient margins despite weak market conditions. Management sees "signs of an early recovery in both North America and internationally" and anticipates "further green shoots into 2026."

The Business Services segment produced $188 million in adjusted EBITDA, down from $228 million in Q3 2024, partly due to an $11 million impact from the partial sale of interest in CDK. The residential mortgage insurer, Sagen, continues benefiting from resilient demand and low losses, though IFRS 17 revenue recognition has slowed due to conservative model assumptions amid Canadian economic uncertainty. CDK's stable bookings from renewal activity and commercial initiatives largely offset customer churn, while strategic investments in product modernization continue. Management notes that "the bulk of the year-over-year decrease in CDK's results is related to technology spend," with margins ahead of acquisition levels and churn stabilizing as new features receive overwhelmingly positive customer response.

Infrastructure Services generated $104 million in adjusted EBITDA, down from $146 million in the prior year, reflecting the sale of offshore oil services shuttle tanker operations and a $7 million impact from the partial sale of interest in BrandSafway. Scientific Games delivered stable performance with improved margins from productivity gains and favorable service mix, despite lower terminal deliveries. Modulaire's utilization faced pressure from sluggish European capital investment, but margins remain higher than when the business was acquired four years ago, demonstrating operational resilience.

Capital allocation discipline remains central to the thesis. BBU generated over $2 billion in proceeds from capital recycling initiatives in the last 12 months, including $1 billion from monetizations and distributions. The Clarios upfinancing alone funded a $4.5 billion distribution, with BBU's $1.2 billion share representing a 1.5x multiple of its investment while retaining full ownership. This creative monetization provides capital for the $250 million share buyback program, of which $160 million has been repurchased, and for funding strategic acquisitions like Chemelex, Antylia Scientific, and First National Financial Corporation (FN).

Outlook, Management Guidance, and Execution Risk

Management approaches the outlook with cautious optimism, noting that "the broader global economy has remained relatively resilient" despite tariff-induced uncertainty. The company is preparing for a more uncertain 12-18 month period as businesses and consumers adapt, but believes its market-leading positions in essential products provide defensive characteristics and pricing power.

Tariff mitigation strategies demonstrate operational agility. Clarios' U.S. batteries manufactured and recycled in Mexico fall under USMCA exemptions, limiting impact. DexKo's diversified sourcing and manufacturing footprint positions it "better than most competitors," and management believes they are "well placed to manage through this" with the ability to take pricing actions if needed. Where exposure exists, impacts are expected to be "manageable and limited to a handful of industrial operations."

AI investments across the portfolio are expected to drive accelerating benefits in 2026. At Clarios, the shift toward more electrified, connected, and automated vehicles represents a significant tailwind, increasing demand for advanced battery solutions. The company holds approximately 50% of the world's AGM capacity and is investing over $2 billion in the U.S. over the next decade to modernize facilities, increase advanced battery capacity, and enhance recycling capabilities. At Scientific Games, digital lottery contracts ramping over the next 12 months are expected to flow through to earnings and cash flow.

The corporate structure simplification, converting all BBU LP units and BBU C shares into a new publicly traded Canadian corporation, is on track for completion early in the new year. Management expects this will improve trading liquidity, increase demand from index investors, and make the business more accessible globally. This matters because the current limited partnership structure may constrain institutional ownership, and a simplified corporate form could narrow the valuation discount.

Capital allocation priorities remain consistent: fund business growth, maintain comfortable leverage, and execute opportunistic buybacks. With units trading at a "material discount to the private market value of our assets," management views repurchases as "an extremely efficient use of our capital, which will be meaningfully accretive to the per unit value." The renewal of the normal course issuer bid provides capacity to repurchase an additional 8 million units over the next 12 months.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is execution of the AI-driven transformation at scale. While early results are promising—Clarios' service improvements, CDK's AI assistant performance, Chemelex's optimization plans—the portfolio's size and diversity create complexity. If the operational transformation playbook fails to deliver expected margin expansion in newer acquisitions like Antylia Scientific or First National, the 15-20% return target could come under pressure.

Tariff and trade policy uncertainty creates near-term disruption risk. While management expects impacts to be manageable, a significant escalation could affect DexKo's sourcing costs and Clarios' cross-border operations. The company's manufacturing footprint provides some protection, but not immunity. Adrian Letts acknowledges that "most businesses, including ours, won't be entirely insulated from the impacts of tariffs or a potential downturn in global growth."

Leverage remains elevated at 2.84x debt-to-equity, higher than peers like Blackstone (0.66x) and KKR (0.74x). While BBU's average weighted debt maturity is almost six years with significant hedging, higher leverage amplifies cyclical risks in industrial and energy-related businesses. The company has no large-scale maturities in the next 12 months, but rising interest rates could pressure portfolio company performance, particularly in rate-sensitive sectors like mortgage insurance and fleet management.

Healthscope continues to face structural challenges in Australia, with a mismatch between revenue growth and cost escalation from wage increases. While management is actively negotiating with insurers and government bodies, this represents a drag on segment performance and highlights risks in healthcare services where cost inflation can outpace pricing power.

On the positive side, several asymmetries could drive upside. The digital lottery opportunity at Scientific Games represents a nearly $100 billion addressable market where BBU is the global leader. As contracts ramp and digital mix increases, margins could expand materially. Clarios' position in advanced batteries for electrified vehicles creates a multi-year tailwind as the aftermarket develops for battery replacements. The First National acquisition provides exposure to Canadian housing finance, where regulatory changes have expanded the addressable market.

Valuation Context: Discounted Compounders

At $35.62 per share, BBU trades at a market capitalization of $3.16 billion, representing just 0.11x trailing sales and 2.19x free cash flow. These multiples stand at a significant discount to both private market transactions and public peers. The recent evergreen fund transaction valued partial interests in DexKo, CDK, and BrandSafway at an 8.6% discount to NAV, which management considered "highly accretive" given BBU's trading discount of approximately 50% to its view of intrinsic value.

Comparing BBU to direct competitors reveals the valuation gap. Blackstone trades at 16.41x sales with 44.6% operating margins and 26.5% ROE. KKR trades at 7.17x sales with 31% operating margins. Apollo trades at 2.92x sales with 29.9% operating margins and 16.6% ROE. Carlyle trades at 6.91x sales. BBU's 14.1% operating margin and -4.8% ROE reflect its industrial operating company model rather than pure asset management, but the 0.11x sales multiple appears disconnected from the quality of assets and historical value creation.

The company's enterprise value of $42.87 billion (6.63x EBITDA) reflects the consolidated nature of its operating businesses rather than a sum-of-the-parts valuation. With $2.9 billion in pro forma corporate liquidity and no near-term maturities, the balance sheet provides flexibility to execute buybacks, fund acquisitions, or reduce debt. The $250 million buyback program, with $160 million already executed, represents a direct return of capital at what management believes are attractive valuations.

For investors, the key valuation question is whether the discount will narrow through corporate structure simplification, consistent capital recycling, and operational improvements. The historical track record of 3x MOIC and 30% IRR suggests the underlying assets are compounding at attractive rates, making the current discount a potential opportunity for long-term value creation.

Conclusion: A Compounding Machine at a Discount

Brookfield Business Partners has built a distinctive model that combines the capital recycling discipline of top-tier private equity with the operational transformation capabilities of an industrial conglomerate. The $6 billion-plus realized from over 20 monetizations at 3x MOIC and 30% IRR provides tangible proof that the strategy works through cycles. Recent creative transactions like the Clarios upfinancing and evergreen fund sale demonstrate management's ability to crystallize value while maintaining long-term optionality.

The AI-driven operational inflection across the portfolio—Clarios' service optimization, CDK's virtual assistant, Scientific Games' digital transition, and Chemelex's manufacturing enhancements—creates a second layer of value creation. These initiatives drive margin expansion and build competitive moats in businesses that were previously considered commoditized. The combination of capital recycling and technology-enabled operational improvement positions BBU to achieve its 15-20% return targets even in a more uncertain macro environment.

The investment case ultimately hinges on two variables: execution of the AI transformation playbook across newer acquisitions, and the pace at which the valuation discount narrows. With units trading at approximately a 50% discount to intrinsic value and management actively repurchasing shares, the capital allocation discipline aligns with shareholder interests. While leverage at 2.84x debt-to-equity and exposure to tariff headwinds present risks, the portfolio's essential nature and market-leading positions provide defensive characteristics that should enable BBU to navigate near-term challenges while compounding long-term value.