Macquarie makes acquisitions

Macquarie Group has a knack for finding value in what should be highly competitive areas. While many companies were worried about survival during the GFC, Macquarie evolved into a global leader in infrastructure funds management and green investments with the use of the Government's AAA credit rating, a government-sanctioned wholesale lending agreement and a government guarantee on deposits.

Now at the opposite end of the cycle with a valuation to match, new chief executive Shemara Wikramanayake is taking advantage of the company's lofty valuation and raising over $1bn to invest in renewables, technology and infrastructure, such as windfarms in the UK and Taiwan. Little detail about the investments has been provided but they're not going to move the needle much for a business currently worth $41bn.

Macquarie has raised $1bn from institutional investors to help avoid dipping into its regulated capital reserves, as a regulatory change has increased capital requirements by $0.6bn in the Commodities and Global Markets (CGM) division, for example. Capital requirements are increasing globally to reduce the risk of another financial meltdown, in turn lowering the profitability of financial institutions already fighting pygmy interest rates. Retail shareholders can also participate in a rights issue up to a maximum of $15,000 from 4 September. 

Wikramanayake also reiterated that earnings for fiscal 2020 will be 'slightly down' on the prior year. The company has a habit of beating guided numbers, but its recent results have included exceptional one-off gains that will be hard to repeat.

While the long-term outlook for Macquarie remains sound, a decade-long rally in financial assets means we expect things to be tougher for Macquarie over the next five years given the high bar for performance that it's set over the past five years. Participating in the rights issue could provide a market-like return over time, but Macquarie's profits can be highly cyclical as they're still heavily dependent on financial activity and performance fees. With Macquarie trading close to a record valuation, we're some way off an upgrade. HOLD.