Macquarie flies into a less-exciting future

THE remaking of Macquarie Group has stepped up a gear. While those within the inner sanctum at the Silver Doughnut deftly spin the propaganda wheels with a revisionist view of history Crisis? What crisis? the speed at which the group is reinventing itself is testimony both to its ability to survive and the depths to which it sank during 2008 and 2009.

Back then, there were almost daily announcements of churn-and-burn deals that characterised Macquarie's phenomenal growth in the early part of this decade.

That kind of activity huge on-balance sheet purchases that either were split and sold, or hived off at enormous profit and for handsome fees into the captive Macquarie listed trusts takes on a much higher risk profile in an era where investors are still wary of debt. Instead, we are witnessing the dismemberment of the Macquarie model discarding its once hugely profitable trust structures in favour of more traditional financing businesses.

The difficulty for Macquarie is that it would be almost impossible to replicate the kind of earnings edifice it constructed during the bull market from 2001 to the end of 2007.

The listed trusts the likes of Macquarie Airports and Macquarie Infrastructure were to financiers what barrels and guns are to fishermen.

Whatever the bank bought, it had a ready buyer; one with an "independent" board that was prepared to pay exorbitant fees for buying assets at an inflated price and then to continue paying fees for management, refinancing and just about anything else you could think of.

It got to the point where clearly there wasn't even any sport involved in the kill.In the past year, those listed trusts largely have been disposed of in the case of MAp, with one last gouge as an exit fee in favour of unlisted trusts.

The bigger story is the new focus on funds management, energy trading and leasing business.

Yesterday, Macquarie announced an expansion in its aircraft leasing business, bought from the beleaguered American Insurance Group for a huge $US1.99 billion ($A2.15 billion). With it came sniggers that Macquarie was heading down the very same runway that saw Allco Equity and Babcock & Brown crash and burn.

Those comparisons are a little unjustified. For a start, the leasing businesses were performers for Allco and B&B. It was the other activities the perilous on-balance sheet and highly leveraged takeovers that brought them undone.

And unlike Macquarie, they didn't have a banking licence a crucial factor that allowed Macquarie to reap the benefits of the federal government guarantees on overseas borrowing and deposits that helped arrest the collapse in investor confidence in the "fee factory" during 2008.

While Macquarie's public focus was on airports and infrastructure, it quietly bought an aircraft-leasing business in 2006 called GATX Air, a business that owns or manages 124 jet aircraft leased to 57 operators.

At the time it was bought, the deal was supposed to be a quick churn blacken the tyres, polish the paintwork and sell it on.

Unfortunately, the financial crisis overtook events, and the leasing business, rather than providing a quick turn, instead delivered a solid earnings stream.

The GATX business concentrates on operating leases shorter-term leases to less financially endowed airlines, where it retains ownership of the aircraft rather than finance leases, which usually are much longer term.

The new business appears to be a step up in terms of quality. The aircraft, Boeing 737s and Airbus A320s, are relatively young, leased to airlines of better than average credit quality and with average remaining leases of more than five years.

The ticket price on yesterday's deal may have grabbed the headlines. But the recent steady amalgamation of overseas funds- management outfits points to a new, if relatively staid, future for Macquarie.

The boldest, the purchase in August of Delaware Investments for $US428 million, could well be the deal-maker for the new-look Macquarie.

A rule of thumb for these kinds of purchases is that you should pay about 3 per cent of funds under management.

At the time of purchase, Delaware had $US125 billion under management, making the Macquarie purchase look like a steal and delivering the potential for enormous profits.

The risk in these purchases is the potential for capital to flee because of the change of ownership.

Macquarie since has negotiated several other large purchases in North American funds management and investment banking.

It is clear the group is on a surer footing. But its future looks less exciting until the next boom.