Brookfield Asset Management (NYSE:BAM) and Blackstone (NYSE:BX) are heavyweights in the alternative asset management industry. Brookfield currently has more than $385 billion of assets under management (AUM), focused primarily on real estate, renewable energy, and infrastructure. Blackstone, meanwhile, has $545 billion of AUM, focused on real estate, private equity, and energy.

Given these investment firms' similarity in size and expertise, investors probably only want to hold one of them in their portfolio. Here's a look at which one is the better buy for the long haul.

A person using a calculator with financial charts on the desk.

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The case for Brookfield

Brookfield is more than just an asset manager. The company also directly invests in the private equity funds it sponsors and takes an active role in managing the businesses it controls. Brookfield has poured more than $44 billion of its capital into the same investments as its clients. It has done this mainly through its ownership interests in four listed partnerships:

  • Brookfield Property Partners: A diversified global real estate company that operates and develops portfolios focused on several different property classes such as office and retail.
  • Brookfield Infrastructure Partners: One of the largest owners and operators of global infrastructure networks that help move and store energy, water, freight, passengers, and data.
  • Brookfield Renewable Partners: One of the largest publicly traded renewable power-generating companies.
  • Brookfield Business Partners: An entity that acquires high-quality businesses across several industries, including business services, construction, energy, and industrial operations.

Brookfield's dual approach to managing assets for clients while also investing directly in and operating those businesses provides it with several revenue streams. In 2018, the company's asset management segment generated $1.1 billion in fee-related income and realized nearly $200 million in carried interest, which is its share of the profits from the funds it manages. On top of that, it collected another $1.7 billion in dividends and other distributions from its direct investments. After subtracting interest expenses and taxes, Brookfield hauled in $2.4 billion in free cash.

Given the projected growth of its asset management business and its listed partnerships, Brookfield anticipates that free cash flow will reach $4 billion within five years. Meanwhile, within 10 years, the company believes it can produce a jaw-dropping $60 billion in cumulative free cash flow. With $10 billion of that money earmarked for dividends and another $10 billion likely to be reinvested in its partnerships, it will have $40 billion available for share repurchases. That's a substantial amount of money for a company that currently has a $52.5 billion market cap. It also increases the odds that Brookfield will continue producing market-crushing total returns.

The case for Blackstone

Whereas Brookfield has lots of skin in the game, Blackstone does not. As of its investor day last year, the private equity giant had only invested $2 billion in capital from its balance sheet into its investments. That was just 0.5% of its AUM. On the one hand, that enabled the company to have a cash-rich balance sheet as well as pay a much higher-yielding dividend: 3.9% vs. Brookfield's 1.2%. Further, it reduces its direct investment risk, since it won't lose much money for shareholders if its investments underperform. However, the company has fewer ways to make money for its shareholders since it's not directly benefiting from investing capital in its funds.

Still, Blackstone makes a significant amount of money managing assets for its clients. In 2018, the company generated $1.5 billion in fee-related earnings. Add in its share of the profits from the funds it managed, and shareholders made $2.7 billion that year.

Those numbers should rise as Blackstone increases its AUM, with the company aiming to get that number up to $1 trillion within eight years. That should enable it to steadily grow its fee-based earnings as well as its share of the profits from the funds it manages. This positions Blackstone to potentially produce healthy total returns in the coming years.

Verdict: Brookfield is the better buy

Brookfield and Blackstone have had lots of success in managing other people's money. However, Brookfield takes things a step further by investing directly with its clients. It therefore has the potential to make more money for its shareholders in the coming years by compounding its returns. That differentiated approach should enable it to outperform Blackstone, which is why I think Brookfield stock is the better buy for the long haul.