The evolution of Macquarie
Macquarie is a group in rapid transition. The juxtaposing of its results announcement with the restructuring of its oldest and largest listed infrastructure satellite, Macquarie Infrastructure Group, helps illustrate the nature of the evolution occurring.
It is evolution rather than revolution because the September half results still contain some legacy influences, with big one-off items in both directions as Macquarie continues to wind down the listed satellite model that, for a time, drove its earnings by generating a myriad of fee streams.
The shift towards less volatile and controversial operational earnings is, however, gaining momentum even before any significant contribution from the spate of recent acquisitions the group has made to take advantage of the distress in the US and Europe financial sectors and to globalise its securities, commodities, advisory and funds management activities.
Macquarie is foreshadowing more of that activity, saying that it would use the $4.5 billion of excess capital in its balance sheet and strong cash position to continue to make strategic acquisitions and expand globally.
The group’s operating income is already rebounding and, excluding the one-off items, it is holding earnings at about the $1.3 billion level achieved in the March half, although this is still well down on the $1.7 billion earned in the September half of last year.
With the write-downs and impairments falling from the $1 billion level experienced in the two preceding halves to about $758 million ($414 million on a net basis after offsetting gains), however, the overall quality of the earnings is improving and their composition changing from a reliance on the listed satellite model towards more sustainable and diversified conventional investment banking activities.
In a perverse kind of fashion, the sharp rise in Macquarie’s compensation ratio, from 40.1 per cent last year to 45.2 per cent, signals the shift in the underlying momentum within the group.
There had been an expectation that Macquarie and Macquarie Infrastructure would provide a punctuation point for its gradual and quite contentious exit from the listed fund sector today. They did, but it was a semicolon rather than a full stop.
After all the controversies surrounding Macquarie Airports' $345 million payment to Macquarie to cut their ties, one assumes the groups weren’t anxious to put a proposal for an even bigger golden parachute to MIG securityholders.
Instead they have chosen to divide MIG in two, putting its interests in the "mature" 407 ETR Canadian tollway and Westlink M7 into a new vehicle that will be managed internally, with Macquarie continuing to manage the remaining eight assets for a higher base fee.
In that "active" portfolio there are some troublesome assets and Macquarie’s continuing involvement can, given its extensive relationships and expertise in the infrastructure sector, be justified – certainly the proposal should be more palatable to MIG securityholders than paying it a $700 million or $800 million fee to go away.
The plan is, it should be said, consistent with MIG’s history of trading assets and spinning out mature assets, as it did with Sydney Roads Group in 2006. SRG was subsequently acquired by Transurban. The initial market reaction to the proposal was positive.
While Macquarie continues to generate controversy, that’s partly because, in this market, its status as a listed international investment bank is unique and also because the failure of Macquarie wannabes like Babcock & Brown and Allco created confusion about the similarities and differences between the various versions of the 'Macquarie Model'.
The fact that Macquarie has come through the crisis, not unscathed but in better shape than its global peers, has underscored the reality that its model was both different and fundamentally more disciplined and robust than those pursued by either its former local rivals or the big US and European investment banks. Macquarie engages in very little principal trading.
The new model being created by Nicholas Moore is emerging quite quickly.
It may not be as sexy or as polarising as the old, but the crisis has created an opportunity to significantly accelerate the global niche expansion strategy that was already in place and to use its balance sheet – and the opportunism that has always characterised Macquarie – to build a meaningful presence in markets in a way that its now-wounded incumbents had once made difficult.
Related Industry Sectors
Related People
Related Companies