John Lehmann: Silver Doughnut fatter but investors lose appetite

The Millionaires Factory, otherwise known as Macquarie Bank, is trying to wean itself off of its favourite party mix - big acquisitions and bigger fees.

Macquarie's stable of infrastructure funds has cut a swathe across the globe in recent times, snapping up British airports, American toll roads and Taiwanese cable television operators with aplomb. Another day, another Macquarie mega-deal.

But while the Silver Doughnut has grown fatter, some of its shareholders have become increasingly disgruntled at its penchant for astronomical fees and multimillion-dollar salaries while the share prices of its funds have failed to fire.

Macquarie bowed to pressure this week from Australian institutional investors, spinning off three Sydney toll roads from its Macquarie Infrastructure Group (MIG) into a simple structure with - wait for it - no fees, no complex maze of corporate entities and no acquisition risk.

The new A$1.1 billion ($1.3 billion) company, to be known as Sydney Roads Group (SRG), will list on the Australian Stock Exchange on July 24. A further re-jig of the giant infrastructure fund may follow the release of a long-awaited review next month.

MIG chief Stephen Allen tasted a little humble pie, while releasing the SRG prospectus in Sydney. "I understand that there is a lot of indigestion over recent acquisitions," he admitted.

The move to go clean comes after local fund managers from the likes of Maple Brown Abbott, Colonial and AMP lost enthusiasm for the Macquarie model, which is a complicated leveraged trust structure pumping fees into a management company.

Of course, their enthusiasm wasn't buoyed by MIG's falling share price - from a high of A$4.25 last July, the security price sank to A$3.28 in late May before recovering slightly.

And it wasn't beyond the comprehension of most investors that if Macquarie's fees were normalised there would be a lift in the value of their investments.

Base and performance fees from Macquarie funds totalled A$700 million in 2005, close to 20 per cent of total revenue and 86 per cent of net profit.

Allan Moss, the head of Macquarie Bank, pulled in A$21.2 million for the year - A$408,000 a week. The bank's top 14 executives together pocketed more than A$137 million.

Earlier this year, CommSec put the microscope on Macquarie's fees, comparing its funds' base fees with non-Macquarie funds.

The average base fee of the four big Macquarie funds (Macquarie Airports, Macquarie Infrastructure Communications Group, Macquarie Infrastructure Co and MIG) was 1.8 per cent; the average of the four other major infrastructure vehicles (Babcock & Brown, Alinta, Challenger and Transurban) was 1 per cent.

On top of that, Macquarie charges performance fees that are typically 20 per cent of outperformance against various benchmarks.

Leading Australian business commentators predicted that unless Macquarie reformed, it could face a revolt with unitholders moving to sack the bank as manager of its funds.

"The base and performance fees that the Macquarie funds pay the parent bank are little more than a whopping, excessive, trailing commission," newspaper and television commentator Alan Kohler said recently.

While Macquarie reacted to such criticism this week, the Sydney roads spin-off does leave questions about the future of both the new SRG business and MIG.

SRG, which will own Sydney's Eastern Distributor, M4 and M5 toll roads, is expected to appeal to MIG's conservative shareholders looking for a lower-growth, high-yielding investment.

But some analysts have already suggested the offering looks over-priced at A$1.15. Goldman Sachs JBWere analyst Alison Booth valued the assets at A95c per security.

It is also unclear whether SRG will appeal to the 44.4 per cent of MIG's register who are foreign shareholders.

Many investors believe further structural changes to MIG are coming, with the possibility of a New York-listed fund being set up holding its US roads.

"The outcome of the strategic review of its portfolio in the coming months could see MIG eventually split into three separate entities with different risk and return profiles," Citigroup analyst Sanjay Magotra wrote last week. "In our opinion, the break-up of MIG will crystallise value."

In the past, MIG has paid out more in distributions to unitholders and fees to Macquarie than it earned in operating cashflow. Last year, MIG distributed A$1.3 billion, before fees, versus its net operating cashflow of just A$246 million.

The demerger may make it difficult for MIG to keep up such high payout rates and analysts are concerned about the group's exposure to interest rates given its generous use of debt.

Maybe, the party is finally coming to an end.

John Lehmann is a Sydney-based financial journalist.