Macquarie hunting slice of US investment market

Macquarie Group is stepping up a quest to grab a bigger slice of the US investment-banking market from Wall St firms such as Goldman Sachs, Morgan Stanley and JPMorgan Chase.

Australia's biggest investment bank, which remained profitable throughout the global financial crisis, said this week it would buy Fox-Pitt Kelton Cochran Caronia Waller for about US$146.7 million ($206.2 million).

In August, Sydney-based Macquarie said it would buy Lincoln National's asset-management business after agreeing in May to purchase Tristone Capital Global.

After adding capital each year since 2006, Macquarie had about A$4.3 billion ($5.2 billion) more than the regulatory minimum at the end of June.

Chief executive Nicholas Moore is putting that money to use in a region that accounts for less than 10 per cent of earnings, shifting away from buying and pooling assets to providing investment services after writedowns ended 16 years of rising profits.

"If they want to continue to grow at the rate they've been growing, they are forced to look outside Australia," said Mark Nathan, who helps to manage about US$4 billion at Fortis Investment Partners in Sydney. "The more they deploy a reasonably lazy balance sheet, the higher the return on equity will be, and the more they justify the share price."

Macquarie stock has more than tripled from a March low in Sydney, trading at 18 times forecast earnings.

Chris Williams, an analyst at UBS in Sydney who has a "neutral" rating on Macquarie stock, said the Fox-Pitt Kelton purchase was "an excellent transaction for Macquarie", boosting its investment banking capabilities in the US and carrying less risk than buying assets and bundling them into funds.

"It's a day-to-day, clip-the-ticket type transaction," he said. "That's a very different profile of risk than going out and buying big assets and gearing them, structuring them, then spinning the assets off into funds or whatever else."

Buying advisory operations brings other hazards.

"They're buying people businesses," said Troy Angus, who helps manage about US$2.6 billion at Paradice Investment Management in Sydney. "The risk is the people don't stay."

Known in Australia as the "Millionaire Factory" for its salaries, Macquarie's employment expenses dropped 44 per cent to A$2.36 billion last fiscal year. Retaining workers meant paying them enough to stay on, said Angus at Paradice.

It is not the first time Macquarie, founded in 1969, has evolved to tap new revenue sources.

Last fiscal year, 40 per cent of operating income came from businesses that did not exist five years ago, including private banking in Asia and Indian and Chinese divisions of Macquarie Capital, according to the company.

Graham Copley, the head of US equities at Macquarie, said this week that the Fox-Pitt purchase doubled Macquarie's equities coverage to 500 stocks and the number of publishing analysts to 42.

- BLOOMBERG