Thursday, March 30, 2006

Macquarie model mocked

Macquarie is not a retail bank. It makes deals. And dollars. Lots of dollars in recent times. It's now known as the Millionaire Factory. It is big and has a profound impact on the Australian market. As recently posted, Alan Kohler points to the acts of Macquarie Bank in selling some assets as one harbinger of a coming market top.

It has found a way to spin the straw of infrastructure into fields of gold. It has leveraged boring old roads and bridges and airports and other public monopolies into bucolic income streams. It has discovered a bit of financial alchemy (chutzpah, maybe) that has gone undetected by the whole rest of the financial world.

And it has made itself wildly wealthy and become the Pin-up Girl of the Australian market in the process.

But it has pretty much exhausted the supply of such projects in Australia and has extended its quest onto the larger world stage, where other financial types are not so starry eyed that they have allowed Moss to grow on their feet.

Jeff Mathews is one of that type. He has a blog that is widely followed in America. He took Macquarie Bank into his sights and saw a similarity of boom and bust that has precedent. He blogs,
What Macquarie figured out was this: it could buy public utilities such as airports, bridges and toll roads, package and resell those assets to Australian asset managers looking to redeploy the cash being accumulated by that country’s far-sighted and highly successful public pension plan, and take out fees along the way.

The impetus behind Macquarie’s willingness to pay 40-times revenue for an asset that could be rendered obsolete by any variety of means—acts of God, acts of State Legislatures, or drivers’ unwillingness to pay tolls when they can drive for free elsewhere—comes from the very brilliant notion that such long-lived assets neatly match the long-lived nature of Australia’s pension liability.

As insights go, that’s a powerful one—and ranks right up there with Mike Milken’s discovery that, contrary to popular perception, junk bonds provided better returns, on average, than non-junk bonds, because the default rate on junk was, on average, lower than generally assumed by bond investors at that time.

I am sure the Maquarie folks are as brilliant as their reputation, and that they know what they’re doing. But I’m not convinced that everybody else who wants to get in on the action now, by buying toll roads or airports or bridges or whatever else bankers decide to monetize, knows much more than the simple fact that it is, for the moment, a highly profitable way to leverage up the public infrastructure.

If I had a bridge to sell, I’d sell it right now.
Closer to home, Alan Kohler has had a few knocks of the model himself:
Sacking MacBank would help
IT IS surely only a matter of time before Macquarie Bank's management of its stable of infrastructure funds begins to fall like dominoes.

It is so obvious that unit holders in the 24 funds should sack the Macquarie bankers that it must even dawn on the fund managers who are under their spell or still grateful enough for the early returns to ignore the benefits of removing them.

And if the existing investors don't do it, the funds will be raided by burglars who do understand what's in the safe.

Losing control of the management of the funds is a major risk for shareholders of Macquarie Bank. In 2005 base and performance fees from the funds totalled $700 million, close to 20 per cent of total revenue and 86 per cent of net profit.

Macquarie Bank and its shareholders are now wondering how long the party can last because most of the funds are underperforming and it is plain to investors in them that if the fees were normalised there would be a huge lift in the value of their investments.

How much? Well, CommSec recently published a like-for-like comparison of the base fees of the Macquarie and non-Macquarie funds. The average base fee of the four big Macquarie funds (MIG, MAP, MCG and MIC) was 1.8 per cent; the average of the four other major infrastructure vehicles (Babcock & Brown, Alinta, Challenger and Transurban) was 1 per cent. The two extremes were MCG at 2.3 per cent and Transurban at the equivalent of 0.45 per cent (that's salaries, not fees). In addition to that, Macquarie charges performance fees that are typically 20 per cent of outperformance against various benchmarks.

Kohler has cast a critical eye at the model before.

As Jeff Mathews said,
"Like Milken, Maquarie has revolutionized a source of financing which others now seek to emulate and exploit. And, like junk bonds, internet stocks, and all financial fads that start off from a logical premise, it will get out of hand."

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