The remarkable aspect of the Macquarie model for investment banking is not the amount of wealth it generates for its executives, although that is remarkable, but how its development has turned the bank into probably the world’s best-performed and fastest-growing investment bank.
The catalyst for transforming Macquarie from an Australian investment bank with limited offshore activities into a globally significant institution was probably the Kennett government’s decision to award Transurban the CityLink tollway concession in 1995. Macquarie’s involvement in advising Transurban, and structuring and arranging the financing for the stapled trust, created the template for its specialist funds strategy.
But even before that Macquarie had, with Allco Finance and Babcock & Brown, developed a niche presence offshore in the complex area of cross-border leasing aided by state Labor governments’ use of exotic leasing structures to get access to cheap funding and circumvent Loan Council borrowing limits.
That experience in the early 1980s would have shown the bank that there were niches in global markets that were below the horizon of the big US and European investment banks.
Macquarie’s history over the past decade, but more particularly the past few years, has been identifying and developing elements of its domestic business that can be exported to create leading positions in global niches.
The most successful of those strategies has been the specialist funds management businesses, where Macquarie has built significant positions in property, airports, tollways, power, water and, most recently, telephone directories.
Macquarie exploits its in-house ability to identify a strategic asset and use its balance sheet to participate in its acquisition. Often it co-invests with the Macquarie “family” of managed funds vehicles.
It uses its corporate advisory and financing skills to structure, execute and fund the deal and sometimes its distribution network and contacts to raise co-investor or institutional funding. It collects fee streams at every level and annuity income streams from base and performance-related management fees.
While there are variations on those themes from deal to deal, the constant is its ability to bring to bear almost every division of the bank to leverage the income it generates.
The rate of offshore expansion is accelerating, perhaps because of the virtuous effects of success – successful deal flow stimulates deal flow – but also because the bank is in the right niches at the right time.
The international institutional appetite for returns that are not correlated to equity market returns – infrastructure and private equity – is soaring and Macquarie’s specialist funds have tapped into this demand. Others are pursuing similar strategies but without the ability of a full-service investment bank to leverage the profits.
Yesterday’s March-year result underscores how successful Macquarie’s strategy has been – and how rewarding it is for executives whose remuneration is tied to outperformance on a sliding scale that steepens in line with the outperformance.
With the bank’s total shareholder return over the past five years nudging 120 per cent, against the local market’s total return of 58 per cent, and its 2004-05 return on equity of 30.2 per cent clearly superior to its global peer group, it is not surprising that the Macquarie remuneration formula is creating extraordinary wealth for its senior executives.
The most striking feature of the result was not the bottom line – up 67 per cent to $823 million – but its composition.
Macquarie’s international income was up 83 per cent in the year. International operations now generate about 37 per cent of income and have grown about 420 per cent in five years. International staff numbers have risen from 326 people five years ago to 1747 at the end of 2004-05.
Assets under management – and increasingly those assets are offshore – grew 42 per cent in the past year alone, to $89 billion, driving a 22 per cent increase in base management fees and a 39 per cent increase in performance fees. In the past year Macquarie raised almost $14 billion from external investors, 40 per cent of it from international investors.
The bank has supported that expansion by investing $2 billion of its capital in its family of funds, and is sitting on $436 million of paper profits on those holdings.
As the bank sells down what it describes as “seed assets” – assets it has acquired and on-sold to its funds – it is steadily releasing capital and profits to fund the next generation of investments.
The strategy has generated its awkward moments, most notably in 2002 when it was accused over paying too much for Sydney airport because of its eagerness to get its hand on the fee income streams, and then followed up with the $850 million acquisition and attempted on-sale of NTL’s Australian broadcast transmission assets just as the collapse of WorldCom threw global capital markets in to a tail spin.
Macquarie’s share price plummeted and it was forced to placate investors in the airports and transmission assets by showering concessions on them.
That now seems like another era. With Macquarie’s listed funds generating total returns of more than 150 per cent over the past five years against a global equity market negative return of 31 per cent, its investors no longer complain about the bank’s ability to extract lucrative fees from every layer of every transaction. The Macquarie model, thus far at least, works for them, too.
By Stephen Bartholomeusz
Source: The Age
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