This is particularly good news for the bank, having seen its share price halve to below A$19 in the year to mid-2002 after it was widely seen to have overpaid on an important deal and overloaded the market with too many capital raisings.
However, the bank is on track to report record profits – up at least 40% up on 2003-2004 – when it unveils annual results in May, and has completed its first year of ownership of ING’s pan-Asian equities business, a deal that has transformed its prospects in the region.
Improved recognition
“The ING acquisition has been a big step in improving our recognition factor,” says Nicholas Moore, the executive director who heads Macquarie’s investment banking and infrastructure division. “The biggest challenge offshore is always staff. If you are a groover in the UK and you get offered a job by UBS or Macquarie, who do you choose?”
The ING deal was unusual for Macquarie – which was formed in 1985 from the local offshoot of UK merchant bank Hill Samuel – in that until now, almost all of its growth has been organic.
Allan Moss, the bank’s chief executive since 1993 and a veteran of its Hill Samuel days, says it was only the second significant acquisition in the bank’s history. The other was the purchase of the Bankers Trust investment banking business, its arch rival, in 1999, three years after Macquarie listed on the Australian Stock Exchange.
The move has also added a third key leg to the bank’s global strategy in a region where, analysts say, it had been struggling to gain critical mass. The first leg is in Australia, where Macquarie – known for its entrepreneurial business culture – is the only independent investment bank to offer the full gamut of investment banking services. The second leg is its international business outside Asia where it targets niche businesses to which it can add special value. In Asia, with the ING purchase, it now has the opportunity to become one of the main overseas investment banks in a region of increasing interest to international investors.
Right time
“They had been frustrated in their regional ambitions, previously,” says Jonathan Reoch, banking analyst at ABN Amro in Sydney. “The ING deal came along at the right time. It was the missing piece of the puzzle and opens up the whole game for them.”
The deal saw Macquarie acquire part of the old Barings business that ING took over in 1995 when the UK bank collapsed. It more than doubled Macquarie’s staff numbers in the region to almost 700 in 10 countries – more than in any other part of the world – and gave it an on-the-ground presence and banking licences in markets such as Thailand, Indonesia, Malaysia and the Philippines for the first time. The deal also brought the bank relationships with a new group of institutional investors, particularly in Europe. It has subsequently relaunched its regional operations under the Macquarie Securities Asia brand, increased staff to about 800, including more than 100 investment bankers and some 80 analysts, rejigged its research product offering and officially opened a Beijing office.
Change in attitudes
The acquisition follows what Mr Moss describes as a turning point, in 2002, in global attitudes to Asia’s importance.
“It was a year in which it became apparent that growth in Asia had become critical to global economic growth,” he says. “That helped focus attention. It is a lasting phenomenon. Asia will be an increasing focus of investor attention for decades to come.”
The integration and development of the ING business, which was breaking even within a few months, is “absolutely on plan” he adds.
“The aim is to have a broad investment banking business in Asia although not as broad as in Australia,” he says. “There are no plans, for example, for an extensive debt securities business. It is better to focus on equities, and on infrastructure and real estate fund management opportunities.”
Macquarie’s focus on specific areas and its willingness to enter into partnerships with others have helped ease its international expansion, Mr Moss says. Its existing partners in Asia include: Shinhan and Kookmin banks in South Korea, one of the countries in the region where it has been most successful; Schroders, the UK fund manager, with which it has a property venture in Shanghai; and Arab-Malaysian Merchant Bank Berhad (AMMB), one of Malaysia’s largest financial institutions, with which it has a fund management joint venture
“We have used co-operation and joint ventures more than other investment banks and we find we are welcomed because we have a philosophy of only pursuing products where we can add special value,” says Mr Moss, sitting in his office overlooking Sydney’s Martin Place, Australia’s equivalent of Wall Street.
“We are not seeking to do everything in every market or to dominate every aspect of business and we have a well-established track record of being a good partner and of being successful at transferring technical knowledge and intellectual property into new markets and new institutions,” he says.
The specialty area for which Macquarie is best known, both in Australia and beyond, is infrastructure funds. A global leader, it now has more than a dozen, most of them listed not only in Australia but also overseas, including the Korean Road Infrastructure Fund, launched in 2003 and its first such US vehicle, which joined the New York Stock Exchange late last year.
Happy accident
It was an area the bank stumbled into almost by accident when it came up with the idea to list Sydney’s M2 Hills Motorway at its privatisation in 1994.
“It was considered a very curious animal,” recalls Richard Sheppard, Macquarie’s deputy managing director. “No one had ever heard of a toll road that was privately listed. It was hard to get institutions interested. To some extent we feel we are still very much in the growth phase and just scratching the surface.”
The model involves identifying and acquiring suitable infrastructure assets, sometimes using its own balance sheet to fund or part-fund purchases, and bundling them into one or more funds that it then manages.
It earns fees from every part of the chain – for the mergers and acquisitions advice on the assets its funds buy and sell, for underwriting the flotation of the funds when they list, for their subsequent capital raisings and for managing them. It also often profits from selling the initial stakes it takes in seed assets for the funds.
Mr Moss says Macquarie was quick to see the potential in infrastructure, in part because of the competitive nature of the local banking sector.
“The Australian market has always been hugely competitive relative to most international markets. Margins have been finer than elsewhere,” he says. “To achieve growth, it has always been important to be entrepreneurial, to look out for new opportunities.”
The bank’s success in infrastructure has not gone unnoticed. Babcock and Brown, the boutique investment house set up in the US in the 1970s, has developed a similar infrastructure model, and relocated to and listed in Australia last year.
But analysts say Macquarie’s head start and the expertise it has accumulated give it advantages. The bank is now rolling out the model in Asia, using the enhanced distribution network brought it by the ING deal. As of mid-April, it was understood to be working on a soon-to-be launched high-yielding infrastructure fund for Asian investors that would include stakes in existing Macquarie funds.
Investor interest
Mr Moss says infrastructure and real estate funds are likely to win increasing favour from investors keen to secure the relatively high yielding and stable income streams they aim to provide.
“We’ve seen a big increase in investor interest in yield as an investment parameter in the last few years and infrastructure and real estate are generally well suited in this regard,” he says. “This partly reflects the ageing of the baby boomers, which means pension funds are having to pay out more and are therefore increasingly interested in investments that provide reliable and growing income streams.”
