Winning formula - aggression and persistence ::

Author: Stuart Washington
Date: 19/05/2007
Words: 895
Source: SMH
Publication: Sydney Morning Herald
Section: Business
Page: 47

THE origins of the spectacularly successful Macquarie Bank model started, paradoxically, in a dud investment in the privatised Loy Yang power station in Victoria.

The investment was housed in a fund known as Infrastructure Trust Australia, established in December 1996, that under-performed the market.

But in a hallmark sign of Macquarie Bank persistence, the fund was renamed Macquarie Infrastructure Group in 2000 and became a prominent investor in a series of toll road operations.

"When we started MIG, everybody out there said it could not be done," a former senior MacBanker has said.

The infrastructure fund model's premise has been to borrow heavily, grow aggressively by acquisition funded by capital raisings, refinance assets at favourable rates as the assets become less risky, and redistribute some of the raisings and refinancing to investors. Crucially, the fund pays management fees and performance fees to its manager, Macquarie Bank, making up a substantial share of the bank's revenues.

Former senior Macquarie staff and outside observers regard the establishment of MIG and its successors as Macquarie Bank's company-making transition.

On March 31, equity in Macquarie Bank's managed funds had grown 61 per cent in a year to total $55.2 billion, providing $859 million in fees for the year, up 14 per cent. These fees represent about 12 per cent of Macquarie Bank's revenues.

The model also involved the creation of a complex, tax-effective "stapled" trust structure, in which investors effectively owned three separate entities stapled together.

To this day most of Macquarie's trusts have this little-scrutinised feature, which involves MIG and Macquarie Airports fielding boards based in Bermuda. For example, Jeffrey Conyers, the deputy chairman of the Bermuda Stock Exchange, sits on both MIG's and MAP's Bermuda entities.

But Macquarie Bank's model is not some static museum artefact about early 21st century capitalism - it has evolved rapidly to confront challenges. In the face of market concerns about rising interest rates affecting the performance of listed funds, Macquarie moved aggressively into unlisted funds, growing unlisted funds under management to $19 billion on March 31 from $6 billion a year earlier.

At an operational level, MIG last September recognised and addressed its underperformance since July 2005, selling mature Australian assets, reducing its exposure to unpopular US assets and embarking on an aggressive campaign of refinancing. The result is it has outperformed a strongly growing market.

The model of Macquarie Bank ingenuity, entrepreneurialism and fee-taking reached its peak in last year's Dyno Nobel acquisition. In this deal it bankrolled the $2.3 billion purchase of the Norwegian explosives business, sold $913 million worth of the business to its long-time client Orica, underwrote the rights and hybrid issue for Orica, and floated the rest in a successful $1.9 billion IPO in April last year while retaining a 4 per cent stake for itself.

The result for Macquarie Bank, picking up advisory, underwriting and debt arranging fees every step of the way: a profit of at least $100 million. Again, this style of deal represents an evolution and extension of Macquarie Bank's model. Asset sales contributed $1.4 billion in revenues, or almost 19 per cent of total revenues in 2006-07.

Peter Hunt, the executive chairman of advisory firm Caliburn, sees a convergence between private equity funds, investment banks and hedge funds.

"The Macquarie model is much more about principal investment. Global integrated investment banks are starting to move in Macquarie's direction. Everybody in the market understands it's an aggressive model based on buying assets and refloating them in some guise."

But there are questions about whether Macquarie Bank pushes its model too hard, and suffers damage to its reputation as a result. This was seen earlier this year when Macquarie Bank willingly switched from being Alinta's internal adviser to being a participant with managers in a buyout.

Macquarie Bank's argument was that it had been asked; external observers quickly drew the conclusion that the bank had figured out participation as a principal would be much more lucrative than its fees as an adviser.

The switch resulted in the bank being very publicly dismissed as internal adviser by Alinta, amid much criticism of its actions, and later being knocked out of the race by Babcock & Brown.

With Macquarie Bank's share price pushing against the $100 mark, even after Qantas and Alinta, there is little to suggest it has been permanently tarnished.

Roger Montgomery, the managing director of listed fund manager Clime Capital and an investor in Macquarie Bank, says: "They have got such great people and smart ways of constructing things that that competitive advantage is sustainable over one or two mistakes."

Peter Chilton, an analyst with Constellation Capital, says: "I probably think that Macquarie is bigger than just Alinta, and provided it keeps on doing deals, it probably just moves on."

In its most recent operational briefing, MIG quoted US Transport Secretary Mary Peters saying that toll roads were an "idea whose time has come".

The idea came to Macquarie seven years ago. And, whether it is US toll roads, Channel Island ferries, world-wide bag carts - Macquarie is in a prime position to push its ideas globally.

"I actually have a lot of admiration for them," says Caliburn's Hunt. "They are one of the few [Australian] companies that have gone out there globally, developed a new model and to date have been very successful."

Macquarie's $140 million men - what they got for the year.

Chief executive Allan Moss...$33.5 million.

Chairman David Clarke...$18.9 million.

Ex-deputy chairman Mark Johnson...$2.3 million.

Investment banking boss Nicholas Moore...$32.9 million.

Ex-bankign and property head Bill Moss...$30.6 million.

Corporate finance head Michael Carapiet...$22.9 million.

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