Chapter 11
Don't waste a good crisis
2 https://www.macquarie.com/au/en/about/news/2009/macquarie-group-to-acquire-delaware-investments.html
3 Macquarie’s record full-year net profit of A$4.706 billion for the year to 31 March 2022 included a net profit contribution of A$3.911 billion from Commodities and Global Markets, up 50 per cent year on year. In comparison Macquarie Asset Management delivered A$2.15 billion, Banking and Financial Services A$1 billion, and Macquarie Capital A$2.4 billion. These figures are all for management accounting profit before unallocated corporate costs, profit share and income tax, which is why they don’t add up to the overall full-year profit number. In the first half of 2023, numbers for the six months to 30 September 2022, released in October 2022 after this book was laid out, the momentum continued, with CGM delivering a net profit of A$1.996 billion, up 15 per cent on first half 2022 but down 9 per cent on second half 2022.
4 In the 1984 financial year forex and money market businesses were merged into a treasury unit under Phil Gardiner, and a bullion and commodities unit was created under Clive Carroll. See 1984 annual report. Carroll had been promoted to the Hill Samuel Australia board in the 1981 financial year, at which time he was director of commodity trading in Sydney. See 1981 annual report.
5 Ray Hall stepped down in 1997 as head of the treasury and commodities group.
6 By the 1996 financial year Ray Hall was serving on the Exco as head of treasury, with Andrew Downe one level down in bullion and commodities, and Simon Wright in capital markets and
foreign exchange.
7 The purchase was confirmed on 21 October 2005. It was also confirmed that Nick O’Kane would relocate to Los Angeles to manage the division and that the founder and CEO, Gregory Craig, and the president, Hans Saeby, would join the Macquarie team as directors and remain in management. Cook Inlet was described at the time as ‘providing physical natural gas trading, transportation and storage services to North American natural gas producers, utilities, wholesalers and industrial consumers’, and the acquisition brought 59 staff, mainly energy traders and marketers. https://www.afr.com/companies/macquarie-bank-plugs-into-california-20051022-jj5cx
Even by Macquarie standards it was a big week. Macquarie Capital Alliance Group bought the Nordic telephone directories operation TDC Forlag for $1.04 billion. Macquarie and FKP Property Group announced they had bought 60 per cent of the New Zealand retirement village owner Metlifecare. Macquarie bought the Isle of Man Steam Packet Group, the longest continuously operating passenger shipping company in the world, for £225 million (then A$526 million), on the bank’s own balance sheet but with the possibility of moving it to a managed fund. And Macquarie Infrastructure Group announced a consortium it was a part of had been selected to provide three road projects in Oregon.
9 Hurricane Katrina, August 2005, and Hurricane Rita the following month.
10 https://www.naturalgasintel.com/constellation-to-sell-downstream-gas-trading-operations-2/
11 Curiously Hochberg, who joined from Cook and was there for the Constellation acquisition, would then leave the merged business to go to the part of Constellation Macquarie hadn’t bought, before coming back again in 2017, and now runs a business acquired from Cargill.
12 The deal came with a related agreement for Macquarie Cook Energy (as it was still called at the time) to supply natural gas to Constellation NewEnergy Gas, a Constellation Energy retail gas subsidiary based in Louisville, Kentucky. At the time of acquisition, the Constellation Energy downstream natural gas trading unit averaged ten billion cubic feet of natural gas marketing per day and had about 130 employees; by comparison, Macquarie Cook Energy averaged three billion cubic feet per day and had 80 employees. The announcement also gave an update on Macquarie Cook Power, an affiliated business servicing North American electricity producers and utilities, which had been set up in 2007. This announcement also confirmed the move to Houston, with O’Kane in charge of the expanded division.
13 We speak on the 33rd floor of the Houston office; the trading floor is two levels down.
14 A third, Cargill’s North American power, gas and global petroleum businesses, would follow in 2017.
15 One thing Macquarie did have to change was the attitude to risk. ‘The biggest difference between the two is the risk culture Macquarie has,’ says Pagan. ‘That’s way more robust, way more emphasis on what-if scenarios and making sure we’re capitalised well and that our liquidity positions can support our activities—which is where Constellation fell over.’
O’Kane recalls this as the one thing Macquarie couldn’t let find its own shape over time. ‘One reason we’ve been successful in the way we’ve done acquisitions is we haven’t gone in and said: you have to do everything our way,’ he says. ‘But the risk parameters are not negotiable.’
16 Mark-to-model refers to pricing positions determined by a financial model of kind. Mark-to-market means letting the market decide what that price is. Mark-to-model tends to be used in opaque areas where it’s not obvious from markets what the price should be. Mark-to-model gained something of a bad name when Enron used the model to price futures contracts. Warren Buffett famously dubbed the approach ‘mark-to-myth’.
17 He departed as head of Commodities and Global Markets on 31 March 2019, also leaving the Exco on that date, but according to the 2019 annual report continued to lead cash equities globally. Nick O’Kane replaced him as head of CGM, which he still is.
18 In the 2022 financial year this financial markets business, also including futures and equity derivatives trading, accounted for 26 per cent of CGM, and asset finance was 9 per cent. See page 73 of this operational briefing from 2020 for a presentation by Simon Wright on his business: https://www.macquarie.com/assets/macq/investor/results-and-presentations/2020/MGL-2020-Operational-briefing---Commodities-and-Global-Markets.pdf
19 The Troubled Asset Relief Program (TARP) was passed by the US government in 2009 to purchase toxic assets and equity from financial institutions. By June 2012, US$467 billion had been allotted, and US$416 billion spent, through TARP. One key element of TARP was that the government expected to be repaid for its outlays. In practice, most institutions wanted to do that as soon as possible in order to free themselves from both the stigma of TARP and some of its restrictions, such as executive compensation limits. Consequently many sold assets in order to repay.
20 At first it retained the Macquarie Funds Group title, but that didn’t last long.
21 To be precise, he crossed it to attack the Hessians, who were German auxiliaries in the service of the British. Today the Delaware River is crossed by the Benjamin Franklin Bridge between Pennsylvania and New Jersey; from the bridge, you can see the logo of the new Macquarie building in Philadelphia.
22 Instinctively, Coyne liked the idea of a private equity structure, but the bidder had wanted to use a model that would have required Lincoln to buy their high yield debt back, which made no sense for an institution that just needed capital.
23 That is to say, there was no overlap in the asset management business between Macquarie and Delaware in 2010. Therefore Macquarie desired all Delaware’s business units and personnel, whereas Aberdeen, for example, would have encountered personnel and business unit duplications would have led them to cut costs.
24 For US$428 million in cash Macquarie would gain a firm with over US$125 billion under management, more than double the US$67 billion-equivalent (A$80 billion) that Macquarie Funds Group, the division Bruck had been running, had under management as a fund manager. By the time the deal closed, on 4 January 2010, Delaware’s AUM figure had already gone up by another US$10 billion.
The transaction was funded out of Macquarie Bank Limited, pulling down the Tier 1 capital ratio there by 1.2 per cent. Naturally, Macquarie Capital (USA) was the financial adviser. The announcement confirmed that Coyne would remain and continue to run Delaware, reporting to Bruck, who would relocate to Philadelphia.
Including the unlisted funds was a different matter: upon completion of the transaction the combined total assets under management of Macquarie and Delaware was over US$300 billion, A$361 billion. https://www.macquarie.com/au/en/about/news/2009/macquarie-group-to-acquire-delaware-investments.html and https://www.macquarie.com/au/en/about/news/2010/macquarie-group-completes-acquisition-of-delaware-investments.html
25 This deal, a relatively rare stroke of ambition for Macquarie in China outside of real estate, involved two separate funds. One was for international institutions looking to buy into Chinese infrastructure. The other would be aimed at the Chinese market, would allow investments in yuan, but would target the same sectors under the same mandate. https://www.wsj.com/articles/SB125065237765942259
27 Specifically cash equities, equity derivatives and structured products. See a release on Tristone here: https://www.macquarie.com/au/en/about/news/2009/macquarie-group-completes-acquisition-of-tristone-capital-global-inc.html and Sal Oppenheim here: https://www.macquarie.com/au/en/about/news/2009/macquarie-to-acquire-sal-oppenheims-equity-derivatives-and-structured-products-business.html
29 The primary market refers to something being issued in the first place: shares, bonds, a loan. The secondary market involves trading this once they’ve been issued. We all do this with shares on the stock exchange, but it can also be done with loans.
30 See Aaron Patrick’s article here: https://www.afr.com/companies/financial-services/macquarie-banker-ben-brazils-highrisk-debt-unit-in-labor-royal-commission-view-20160426-gofbei
31 See the chart on page 69 of this presentational from the 2016 operational briefing, which starts in January 2009 with the annotation ‘capability at inception focused on primary and secondary loans’. This chart also illustrates movements in credit spreads in single B and BB-rated loans—there was a time in January 2009 when credit spreads were 2000 basis points on single B—and also shows how the book size varied between about A$9–12 billion from 2010 to 2015. https://www.macquarie.com/assets/macq/about/news/2016/mgl-about-news-2016-operational-briefing-full-presentation.pdf
The 2010 annual result disclosed that the loan and finance lease portfolios rose to A$12.9 billion from A$6.9 billion in the year to 31 March 2010, partly because of the acquisition of A$1 billion of auto finance portfolios from Ford Credit, which was exiting the Australian market, and a portfolio of 47 modern aircraft from International Lease Finance Corporation for US$1.7 billion.
32 See page 30 of this presentation: https://www.macquarie.com/assets/macq/investor/results-and-presentations/2010/MGL-2010-Full-year-Result-presentation.pdf
33 CAF contributed A$264 million to total profit in the 2010 financial year, up from A$66 million the previous year. That 40 per cent decline in operating lease income followed a decrease in the operating lease portfolio from A$1.4 billion at March 2009 to A$692 million in March 2010. https://www.macquarie.com/au/en/about/news/2010/macquarie-group-announces-aud1-05b-full-year-profit.html
34 See also the chart on page 52 which shows $3.7 billion in corporate lending portfolio growth https://www.macquarie.com/assets/macq/investor/results-and-presentations/2010/MGL-2010-Full-year-Result-presentation.pdf
35 That $33 billion figure is quoted from a 2016 operational briefing, and is referred to in the AFR here: https://www.afr.com/companies/financial-services/macquarie-becomes-global-junk-debt-player-20160317-gnlkjm. The size of the funded loan portfolio at any given time in those years was typically around A$10 billion, for example, A$10.1 billion at 31 December 2015.
This video following an operational briefing in February 2016 explained the structure of CAF at the time, including CAF Lending: https://www.youtube.com/watch?v=yrWhpigUJOk. Ben Brazil comes in at 3.30.
37 Annual reports 2015–2020.
Overall, Stuart Green notes that A$4.5 billion of fees were earned by the government from the institutions it supported, with zero losses, citing a Reserve Bank Bulletin which reviewed the scheme in the March quarter of 2016.
39 In an operational briefing in February 2010, Macquarie said it had not raised money under the government guarantee since August 2009. https://www.macquarie.com/au/en/about/news/2010/macquarie-group-operational-briefing-2010.html. Its US$1 billion 10-year bond in January 2010 brought the total of non-guaranteed debt to US$2.5 billion in the previous six months.
40 Stuart Green says that in 2007 and 2008 Macquarie’s term funding issuance was A$33 billion. For 2009–10, the period covered by the guarantee, it was A$32.5 billion. ‘It was virtually identical in terms of the amount.’
41 31 March 2010. A unitholders meeting was held on April 22, then the transition took place on 31 July. See page 24 for dates and page 26 for the impact on the funded balance sheet. https://www.macquarie.com/assets/macq/investor/results-and-presentations/2010/MGL-2010-Full-year-Result-presentation.pdf
42 https://www.asx.com.au/asxpdf/20100422/pdf/31pxm83sx4qf90.pdf
44 Beneath the surface, the global infrastructure and real estate funds became Macquarie Funds Direct under John Roberts as chairman and London-based Martin Stanley as infrastructure assets head (a year later yet another reorganisation would create Macquarie Infrastructure and Real Estate, or MIRA, to house these funds, and even that’s now obsolete, with MIRA being replaced by Macquarie Asset Management in mid-2020). The same day, Tim Bishop, Stevan Vrcely and Garry Farrell were appointed to the Exco, which told us two things: that Macquarie was paying increasing attention to the importance of the US, where Bishop was country head at the time; and that corporate and asset finance, which that day inherited all of Macquarie’s real estate lending activities, warranted a seat at the top table.
45 For non-EDs, all retained profit share would pay out in Macquarie stock, and the number of new share options granted would be reduced.
46 2022 annual report, page 97. https://www.macquarie.com/assets/macq/investor/reports/2022/macquarie-group-fy22-annual-report.pdf
47 The changes were linked to a review of a new regulatory standard and to the global war for talent making staff retention more difficult. The deferral for key executives is being cut from seven years to five years, but is offset by Macquarie’s elimination of accelerated vesting upon retirement.
48 https://www.asx.com.au/asxpdf/20100730/pdf/31rlskhr9tbkns.pdf
49 Along with every other director who was standing for re-election.
50 Campbell and Maguire are only two examples of artists whose careers were still in their formative stages when their works were acquired.
51 The trio are the most recent chairs of the Macquarie Foundation, with Harvey serving as the current chairman.
