Back on the road to higher-risk deals

The word 'infrastructure' creeps back into Macquarie's shareholder briefings.

By InvestSMART · 28 Apr 2012

By InvestSMART ·
28 Apr 2012

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The word 'infrastructure' creeps back into Macquarie's shareholder briefings.

THERE were shades of Macquarie of old as the word ''infrastructure'' crept back into the investment bank's shareholder briefings.

After blowing hundreds of millions on infrastructure write-downs following the financial crisis and exiting several troubled satellite funds, the investment bank is again talking up infrastructure as a means to underpin earnings.

Macquarie still ranks as the biggest infrastructure fund manager in the world and, as profit falls away in other areas, infrastructure is again proving a constant income stream. In the latest year, base fees and bonus fees for managing tollways and utilities generated $1 billion in revenue for Macquarie. Meanwhile, advising stricken governments around the world on asset sales has provided much-needed work for Macquarie's investment bankers.

Since the financial crisis, Macquarie has curbed its higher-risk infrastructure deal-making to focus on businesses that give it annuity-style income. This extends to wealth management and the management of infrastructure on behalf of superannuation funds.

Meanwhile, with Macquarie's profits and investor returns heading down, so are bonus payments to its top executives. Gone are the days of pay cheques in the tens of millions of dollars for top executives, although returns are still measured in the millions of dollars.

The latest profit result shows chief executive Nicholas Moore was paid $7.79 million in salary, bonus, benefits and vested shares over the past year, down from $8.69 million a year earlier. This included a $2 million cash bonus, down from $2.7 million last year.

Macquarie's investment banking head Tim Bishop took a hefty pay cut as his business struggled in the face of a tough M&A market. Mr Bishop was last year paid a total of $998,732, well down on the $3.78 million a year earlier.

Macquarie was once known as the ''millionaires factory'' for its payments to top executives. At the peak of the sharemarket boom, former chief executive Allan Moss and Mr Moore, then Macquarie's investment banking boss, each took home in excess of $20 million.

Return on equity, a gauge of how well Macquarie reinvests shareholders' earnings, was 6.8 per cent, well below the bank's cost of capital and down from 8.9 per cent last year.

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Frequently Asked Questions about this Article…

What role does infrastructure play in Macquarie’s business strategy today?

Infrastructure is back at the centre of Macquarie’s investor briefings. The group still ranks as the world’s biggest infrastructure fund manager and is using infrastructure assets — like tollways and utilities — to provide steady, annuity-style income that helps underpin earnings.

How does Macquarie generate revenue from infrastructure assets?

Macquarie earns base fees and performance/bonus fees for managing infrastructure such as tollways and utilities. In the latest year those fees generated about $1 billion in revenue, and the firm also earns advisory fees when helping governments with asset sales.

Has Macquarie changed its approach to higher‑risk infrastructure deals since the financial crisis?

Yes. After large write-downs during the financial crisis, Macquarie curtailed higher‑risk infrastructure deal‑making and shifted toward businesses that deliver annuity‑style income, including wealth management and managing assets on behalf of superannuation funds.

What does Macquarie’s focus on infrastructure mean for everyday investors?

For investors, the shift toward predictable infrastructure income can help stabilise earnings. However, the article notes Macquarie’s overall profits and investor returns have fallen, so the infrastructure focus is part of a strategy to steady income rather than drive rapid profit growth.

How have Macquarie’s profits and shareholder returns been tracking?

The article reports profits and investor returns are down. Return on equity fell to 6.8% (from 8.9% the prior year) and is below the bank’s cost of capital, signalling lower profitability relative to previous years.

Have executive pay and bonuses at Macquarie been impacted by weaker profits?

Yes. With profits and investor returns falling, bonus payments have been reduced. Chief executive Nicholas Moore’s total pay was $7.79 million for the year (down from $8.69 million), including a $2 million cash bonus (down from $2.7 million). Investment banking head Tim Bishop saw his pay fall to $998,732 from $3.78 million the prior year.

Does Macquarie still do advisory work and other services beyond fund management?

Yes. The investment bank continues to advise governments — including troubled ones — on asset sales, which has provided important deal flow and fee income for its bankers even when other areas have softened.

Should investors view Macquarie as a lower‑risk choice because of its infrastructure emphasis?

Macquarie’s pivot toward annuity‑style infrastructure and wealth management reduces exposure to the highest‑risk deals, but it does not eliminate risk. The company’s returns have dropped and ROE is below cost of capital, so investors should weigh the relative stability of infrastructure fees against overall profit trends and market conditions.