Macquarie poised for change as Moore takes the hot seat

May 24, 2008

Jennifer Hewett, The Australian

What next? Nicholas Moore is not a man to show much emotion. But he is "pretty excited" about his start as Macquarie Group boss this morning.

Not that the shift will be too dramatic, at least at first.

Nicholas Moore has been the logical successor to Allan Moss as well as the key financial engineer behind Macquarie's extraordinary growth over many years. But despite his assertions that the Macquarie model will remain firmly in place, Moore, at 49, knows better than anyone that change has to be an essential part of that model.

"Will it be a different organisation in one year's time, two years, five years?" he says. "Yes, because it is our strategy to be constantly growing, constantly investing."

That strategy has been extremely successful for decades, with another record profit of $1.8 billion, up 23 per cent, announced last week. The difficulty, however, is how to translate slowing momentum into future growth.

The first six months of the year to March 31 were better than ever for Macquarie. The second six months saw profits increase by only 1.4 per cent.

Clearly the market is disenchanted with what it understands as the Macquarie formula. Financial services, particularly those specialising in complex products and tax-driven, highly leveraged structures, are seen as yesterday's market fashion.

Faced with Macquarie's results, a sceptical market focused on Moore's cautious prediction that it would be challenging, though not impossible, to repeat its record profit next year.

The Macquarie share price closed down 58c yesterday at $58.40, a remarkably long way down from its $97.10 high.

"It's a really hard thing to talk about the share price," Moore says.

"The simple fact is, when you put the Macquarie share price on a chart and line it up with the international investment banks, you will see there's a strong correlation."

That's even if Macquarie has managed to juggle its potential problems considerably better. It has liquid assets of more than $18billion, $3 billion spare capital and boasts it has no material credit exposures or problem trading.

Instead, its new CEO talks confidently more about finding "opportunities" in this environment. But Macquarie, for all its success, has also become the bank many people love to hate.

Its aggressive style, its ubiquitousness, its ability to charge ever larger fees and commissions, have all helped.

The hostility comes from its competitors and, in some cases, from clients, particularly given that many of them are now looking at large losses.

And nothing riles the public or the politicians more than Macquarie's role as the exemplar of executive excess when it comes to pay.

Moss walked out the glass door with about $80 million worth of farewell presents, for example, and Moore's remuneration dropped slightly this year -- but it was still $27 million.

Kevin Rudd weighed in with the inevitable political response, suggesting it was "disappointing" when corporate leaders didn't show restraint when a lot of people were "pulling tight on their belt".

That's a sensitive enough topic when share prices are surging.

When shares have plunged and people are feeling nervous about their own superannuations, it quickly turns toxic. The unflinching Moore will now be chief target as well as chief executive.

The Macquarie response has always been to ignore the persistent criticism and just keep on keeping on. That has meant outgrowing its Australian roots as the investment bankers saw and seized the big money potential in infrastructure and specialised infrastructure funds.

Macquarie Capital is the group's financial powerhouse, particularly its massive advisory and funds businesses -- with fees to match.

Even if it spectacularly failed to propel a private equity takeover of Qantas last year, the size and range of its interests in Australia is overwhelming.

There's always another deal -- witness its role in the consortium just awarded the $4.8 billion project to build the Brisbane airport link tunnel.

It is also looking hard at some involvement in the Rudd Government's proposed new broadband network.

Yet two thirds of Macquarie Capital's profit was generated internationally last year, with Moore now insisting that the rise of the Asia-Pacific region will counter slowdowns in Europe and the US.

And while Macquarie hired another 3000 people over the past 12 months, to now number more than 13,000, it recruited more graduates in London than Sydney.

"Albeit markets are challenging, but the group is in a really good position," he insists. "We've never had such a strong team ... We've never had such a strong capital position and frankly, even in the current capital markets, we've never had so much funding on the balance sheet. So we're better placed than we've ever been."

Still, at least some of the more reliable profits of the previous years are no longer available. The era of low interest rates and rising asset prices that rocket-fuelled so many deals, and so much of its growth, has simply vanished.

"We're not immune," Moore concedes. "We're part of the overall global financial system and more expensive debt will have an impact on us."

He says it's too early to tell what the impact of the funding costs on asset values will be.

"But we're seeing a different impact on different asset classes.

"So we're seeing, with major infrastructure transactions, prices holding up well. Debt is still available.

"The impact on private equity transactions we would expect to be more marked and that is certainly what we've seen. The third category is property where there's less finance available.

"We're seeing that have an instant impact on the listed market, and listed securities falling, but beyond that, we're seeing people to a certain extent on the sidelines, watching."

The question is whether they will join in, as further falls in price become inevitable.

Moore says carefully that Macquarie economists are fairly bullish about the economic outlook. He won't commit to a personal view.

"We're very cautious about all the markets where we're carrying on business," he says.

"We're always cautious but we are particularly cautious at this stage. We always do very detailed recession scenarios and we're certainly continuing to do that."

He even equivocates about whether he is an optimist.

"The answer is sort of yes and no," he says. "You always have to look at what could be the optimistic case in terms of working out whether it's a good investment or a good use of time.

"Against that, I think everybody at Macquarie has a deep sense of conservatism, a deep sense of really recognising risk.

"So we're all very conscious of the market we're in, and what has happened over the last six months."

In Macquarie speak, it's known as "freedom within boundaries" -- where people closest to the action drive the ideas and products and projects but only after "the centre" back at Macquarie Place assesses the risks.

It has clearly worked better than the processes at the purported mini-Macquaries of the past few years, like the struggling Allco Finance and Babcock & Brown.

But Moore insists he is extremely optimistic about the medium to long-term, no matter what happens in the short-term -- including to asset prices.

"There is a cyclicality about the listed assets," he says. "We have seen cyclicality before so we have seen them rise in value and we have seen them fall in value.

"Our focus is very much on actually looking at the underlying assets and making sure we get them to perform to the best of their potential."

And that means, he says, hiring the best industry people to run them, rather than relying on investment bankers.

He cites the improvement in Thames Water as his favourite example. It makes him a passionate defender of the Macquarie specialist funds model, including defending the fees that go with with it.

"It's human nature to see a fee and say: 'why should I pay that?'," he says. "But I think people understand, when you do sit back and explain it all, they acknowledge that there's a very important function being fulfilled here. We're in the market raising funds at the moment and we're finding very good investor support."

But the bank is increasingly concentrating on the unlisted market where investors seem far more willing to bet on the long term reliability of Macquarie returns.

"Investors in the infrastructure space have received a compound return of more than 16 per cent over the years notwithstanding the recent performance of the listed funds," Moore says.

Tell that to a shareholder in Macquarie Infrastructure Group, currently trading at a big discount to its net asset value.

They will expect Moore to earn his money fast.