Macquarie Bank builds globally by specialising

Australia's Macquarie Bank is gobbling up assets from Taiwan to France as it replicates around the globe its business model of fee-generating managed funds, the heart of the bank's growth strategy.

With operations in more than 21 countries, Macquarie, once a small branch outpost of a London merchant bank, has turned the spotlight on its business with a bid for the London Stock Exchange and its push into North America.

The bank has been buying assets ranging from property, airports, utilities and toll roads to resthomes and broadcasters to feed its specialist managed funds.

Macquarie advised on 140 completed and announced deals worth nearly US$48 billion ($70.7 billion) in 2005. A Deutsche Bank report said it derived almost a third of its M&A fees in the 2006 fiscal first half from deals for its specialist funds.

Analysts said Macquarie's specialist funds were built on a model similar to real estate investment trusts and diversified by asset type, by location and by where the funds were listed.

"What that means is higher growth, captive clients and bigger synergies," JP Morgan analyst Brian Johnson told Reuters. "And the more you diversify, the less risk there is."

Macquarie has listed funds on exchanges in Sydney, New York, Toronto, Singapore, Auckland and Seoul and is considering listing its Korean Road Infrastructure in Seoul. It also manages the unlisted Macquarie European Infrastructure Fund.

"The increasing international awareness of the Macquarie Bank brand should ensure greater access to global capital, enabling the continued development of the specialised funds model worldwide," ABN Amro analyst John Heagerty said in a report.

Macquarie chooses assets with predictable long-term cash flows exposed to limited competition or assets that are monopolies. It then sells those assets into a fund it has set up.

"When one of the more immature funds makes an investment, Macquarie puts in equity alongside the fund," said an analyst, who asked not to be named.

As a fund matures, Macquarie does not have to use its equity but still collects management fees. If it advises a fund on a deal, it collects advisory fees. Moreover, if a fund outperforms a stock market index, the bank also collects performance fees.

"The pool of securitisable assets is expanding at a far greater rate than new capital flowing into the funds management area," JP Morgan's Johnson said. "The other thing is that Macquarie Bank have a major head-start."

About two-thirds of Macquarie's M&A advice was conducted outside Australia in the bank's fiscal first half-year. Offshore revenue made up 46 per cent of Macquarie's total revenue in the half. Assets under management in its specialist managed funds were A$63.86 billion ($70.2 billion) at September 30, a 57 per cent jump on A$40.78 billion a year earlier.

The bank earned performance fee income of A$168.5 million from five listed managed funds. Macquarie said in November the large performance fees from its listed specialist funds in the first half were unlikely to be repeated in the second half but it still expected to at least match in 2006 its record 2005 profit of A$823 million.

Investors have bought into the funds for the attractive yield when compared with bonds and amid buoyant equity markets. This has helped Macquarie sell its seed assets more quickly and move on to buying more assets and setting up more funds.

"Whilst historically Macquarie Bank has been able to very efficiently recycle its capital into one of its investment funds - nine months on average for its seed assets - we believe it will become increasingly difficult for Macquarie Bank to continue to do so," Goldman Sachs JBWere analyst James Freeman said.

The roll-out of the Macquarie model could run into a possible oversupply of assets, the risk of poor performance in infrastructure investments that reduce demand for new equity, and an increase in competition, Freeman said.

- REUTERS