If it was American, Macquarie Bank would probably attract even more attention in its home market than a Blackstone or a KKR. In Australia, however, it is often regarded with a mixture of envy and derision.
Even so, the Aussie investment bank that emerged in the early 1990s from the branch office of a UK merchant bank, with a small staff and very modest earnings, has managed to punch way above its weight in key financial centres to become known as an incessant deal-maker, shopaholic and the world’s largest manager of infrastructure assets.
Europe had better watch out. On Tuesday, after reporting the 15th consecutive year of profit — an impressive 60 per cent annual leap in net profit to A$1.46bn ($1.22bn) — it declared itself a “global institution” and said it is applying for a UK banking license to support the growth of its European operations.
However, that does not mean the bank is moving its HQ anywhere, said Allan Moss, the mild-mannered chief executive, not least because Australia is still Macquarie’s biggest single market and is close to Asia (which is set to become its biggest market). Alongside the 60 per cent leap in net profit, international income rose 70 per cent to A$3.46bn, accounting for 55 per cent of total operating income.
This robust performance, according to Crikey.com.au, the Australian website, completes the conversion of Macquarie into what could be classed as one of the world’s biggest private equity firms, with a global empire of more than 10,000 staff managing total assets worth almost A$200bn.
“Whilst all divisions recorded record results, it is the private equity-style direct trading of assets that has delivered the step-change in profits,” says Stephen Mayne, Crikey’s chief business commentator.
“Base fees on the various Macquarie funds are producing a very tidy A$800m a year, but performance fees in 2007 were only about $70m — the lowest for five years and nothing like the $300m in 2005. This is because the bank now often directly buys the best assets for itself and then flips them into associated funds or to third parties,” Mr Mayne writes.
“The conversion to a giant private-equity fund is best demonstrated by the fact that Macquarie’s mortgage book of A$22.25bn and its loan book of A$19.6bn is now exceeded by its holding of ‘trading assets and other securities’ which rocketed from A$17.24bn to A$29.64bn over the 12-month period,” he notes.
As for the planned capital raising, announced Tuesday: analysts noted it is identical to Macquarie’s tactics a year ago, when it also took advantage of strong financial results to bolster its balance sheet, raising A$700m in a placement. Brokers said they expected the bank to raise a slightly larger amount this time. Last year’s placement was made at A$66, against Monday’s closing price of A$89.50.
Mr Moss did not dwell, on Tuesday, on the humiliations of the past week or two — the failed Macquarie-led A$11bn bid for Qantas and its defeat by a smaller rival — Babcock & Brown and partners – in its A$6.5bn bid for Alinta, the Australian energy group. The present financial year had got off to a “strong start”, said Mr Moss, and if present market conditions prevailed, Macquarie would be well positioned for further good earnings growth.
Mr Moss has reason to smile — his total pay in the fiscal year jumped 58 per cent to A$33.5m, making him the highest paid CEO of a publicly traded Australian company. Nicholas Moore, head of the firm’s investment banking unit, received the next highest total salary, with a 60 percent increase to A$32.9m, reported Bloomberg.
Even so, while such success is admired in many other countries, in Australia, the environment has “turned” for Mr Moss and his colleagues, noted Malcom Maiden, columnist for the Sydney Morning Herald. “When the bank was brash and rising, it was viewed as a national champion, but these days it is generating more negative than positive publicity”, he wrote.
One reason is due to what Mr Maiden calls “a classic Australian reaction against extreme success, and the way Macquarie rewards itself for it,” and partly a reaction to the multi-layered fee-based income-generating model the bank deploys.
But it is also related to the fact that Macquarie is “running out of targets”, he says. Its size is forcing it remorselessly towards larger and larger deals, and in this country there is a limited supply of them — and the easy ones are done.”
The result is that Macquarie is taking on projects of significantly greater complexity and political risk: Qantas was the classic example but it is in the weave of Alinta and other deals, too, Mr Maiden says.
What can Moss and his colleagues do about this?, he asks
“On one level, nothing at all. Macquarie chases deals around the world and the process is automatically internationalising the bank’s profit base.”
But the UK licence application is cause to consider whether it makes sense in the medium to long term for Macquarie to remain Australian, he reasons. “As time goes on, an increasingly large share of its income will come from deals constructed overseas.” Some of them, like Macquarie’s unsuccessful 2006 tilt at the LSE, “will be controversial”.
“But most of them will not be: the northern markets are deep enough for a company of Macquarie’s size to graze quite peacefully, away from the tension and drama its size is now generating here. And, he concludes, “who could be surprised in a few years if MacBank’s headquarters had also not gravitated to where the money is?”