Chapter 4

1 In those days, though, some of Macquarie’s newer outposts were still not set up for computer-generated projections. 

2 Irene Moss has been Commissioner of the Independent Commission Against Corruption, the New South Wales Ombudsman, and the Federal Race Discrimination Commissioner for the Human Rights and Equal Opportunity Commission. 

3 From 1 July 1998, the Australian Securities and Investments Commission (ASIC). 

4 Like many, Bill Moss would collide with Berg sometimes on risk decisions—or the culture he represented. ‘There’s always someone running credit who is hard-nosed, difficult to get on with, wants a confrontation and rejects things,’ he says. ‘But what I found out later was that Tony was really behind it, encouraging them to challenge you and push you to see if you really believed in something.’ 

5 Ben Bruck, who joined under Berg and would go on to have a successful 30-year career at Macquarie, found Berg’s instincts and rigour towards risk exceptional. ‘He had this really good sense of what sounded right and what sounded not so right. 

One of his tenets was that we shouldn’t go overseas unless we had extraordinary competitive advantage. And so under his tenure we tended to stay focused on Australia and to avoid things that were really outside the box.’ 

6 Though they hold a certain iconic position in Australia, Jaffas are actually British. 

7 House prices fell 10 per cent in Melbourne and 9 per cent in Sydney between 1989 and 1991. https://www.afr.com/wealth/personal-finance/property-lessons-from-1990s-recession-20201109-p56cry 

8 Not counting one of the Hill Samuel Australia years. 

9 1990: $43.6 million profit after tax, up 43 per cent year on year, a return of 25.5 per cent on average shareholders’ funds. 1991: $52.9 million, up 21.4 per cent, and a 24.6 per cent return on average shareholders’ funds. 1992 was a record in pre-tax profit, at $74.6 million, but a higher income tax provision reduced the after-tax profit to $47.2 million, down 11 per cent year on year. That would be the first ever decline in profits at Macquarie (though there had also been a year of decline as Hill Samuel Australia).

10 1991 annual report.

11 The 1992 annual report includes a detailed section on the Financial Packaging Group, which illustrates how important it had already become. By then, the group was handling financial advisory on debt raising, project finance, debt restructuring, German cross-border leases, Japanese leveraged leases for telecoms equipment and shipping containers, structured debt facilities, guarantee facilities and cross-border preference share issues. This section says the group pioneered cross-border leveraged leasing on telecommunications equipment out of the Swedish and Japanese markets, including the first such leases done into Australasia and subsequently into Europe. Others included the first fully funded Japanese lease on non-aircraft equipment into the USA and the first ownership leases between the USA and Australia. This section also includes an early mention of a power plant that would become very important to the Macquarie story: Loy Yang B, the first major privatisation of power generation in Australia, upon which Macquarie advised Mission Energy.

12 These leases were successful because they involved two owners of an aircraft, which allowed for two separate tax deductions, one each in Australia and Japan, on the same machine. The art of the process was to work through the documentation in order to prove it was owned by both parties in both countries. There would eventually be a transaction with three owners in three countries.

13 Oliver’s older brother Peter, with whom he won this deal, thinks the objection may have been more about the credit quality of their new client. ‘There was pushback, not because it was an international client, but because the first client we were so stupid to propose was rated something like triple C,’ he says. ‘That got us the dummies award.’

14 Ironically, two of those challenges were that it was listed and international, two attributes he had pushed back against at Macquarie.

15 $73.9 million after tax, up 23.6 per cent.

16 Full disclosure: Euromoney magazine is co-author Chris Wright’s employer.

17 ‘Evolving in unison’ is taken from the 1994 annual report, which takes an evolutionary theme, with the skeleton of a logo within the Holey Dollar logo on the cover. It is intended to allude to Darwin’s Origin of Species from 1859, but it also bears more than a passing resemblance to Ridley Scott’s Alien of 1979.

18 Starting with a US$50 million 10-year sub debt issue off the program.

19 Today it supplies half of Victoria’s electricity requirements and is the mainland connection point for the Basslink cable to Tasmania.

20 The best known at this time was selling State Bank of Victoria to Commonwealth Bank in 1991.

21 See the 1992 and 1993 annual reports. In 1992 the report refers to advising Mission Energy on a bid for a 40 per cent interest, and refers to a A$1.4 billion transaction. In 1993 the figures have changed slightly: ‘One of the rules during the year was the largest A$ financing ever completed in Australia, the purchase by Mission Energy of 51 per cent of the Loy Yang B Power Station in Victoria. This was successfully completed through the ability of the Group to resolve a wide range of issues.’

22 Of particular relevance, NSW Premier Nick Greiner, in office from 1988 to 1992, championed the idea of public–private partnership in road development in Sydney, with the M4 and M5 created in the time of his government.

23 Today Australia’s superannuation funds hold more than A$3 trillion, one of the largest institutional asset pools in the world, and wildly out of step with the size of the national population. Superannuation funds today are among the most sophisticated institutional investors—and frequent investment partners with Macquarie in infrastructure.

24 These were introduced by the Infrastructure Borrowings provisions of the Development Allowance Authority Act 1992. They would be ended by the Taxation Laws Amendment (Infrastructure Borrowings) Act 1997, which abolished their tax concession. It did so, according to Parliamentary papers, because ‘the IBs tax concession was not achieving its intended objectives. Schemes were being proposed that exploited the concession for tax minimisation purposes. Such schemes, if allowed to proceed, would have substantially increased the value of the tax benefits being captured by financiers and tax planners without a commensurate increase in funding for genuine private sector infrastructure projects.’ https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/Pre1999/tlaib97/report/c01

25 By the time Peter Costello axed them in 1997, jaded by tax-aggressive financing arrangements, the government calculated it had received applications for 98 projects. That reflected borrowings of at least A$28.2 billion, with a revenue cost of more than A$4 billion. 

Between 1994 and 30 June 1996, the Development Allowance Authority issued certificates for twelve infrastructure borrowing projects with a total borrowing of $4 billion. As of 30 June 1996 it had six applications on hand with total borrowings of at least $2.6 billion, and then received applications for a further 71 projects with estimated borrowings of around $21.6 billion in the six weeks up to the 1996–97 budget. ‘If all these applications were certified, the revenue cost over the period 1996–97 has been estimated to exceed $4 billion.’ https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/Pre1999/tlaib97/report/c01

26 He had worked on toll road deals with Westpac (Sydney Harbour Tunnel and the M4 bid) and Wardley (the M5 bid).

27 To make this booklet, the team took the construction cost and traffic forecasts from the Environmental Impact Statement (EIS), made assumptions on operating costs in the financial markets of the day, and crunched the numbers. Macquarie’s model suggested a government subsidy of about $100 million would be needed to get a private owner to finance the M2 construction; Abigroup would win the tender with a zero subsidy, as its construction cost was significantly lower than the EIS estimate, the traffic forecast was significantly higher, and interest rates had fallen, Salisbury recalls.

28 At opening, the motorway would be owned by the Hills Motorway Group, which in turn would be owned 26.7 per cent by Colonial First State, 8.1 per cent Abigroup, 8.1 per cent Obayashi Corporation, and other stakes held by Mercantile Mutual, Portfolio Partners and AMP Limited.

29 Best recalls some institutions being visionary about the future, Greg Perry from First State being an example, telling him: ‘it’s going to take two and a half years to build it, so the only way we’re going to be able to give you a return is by over-raising and giving you your money back through an infrastructure bond structure’. 

This logic had its origins in the group’s expertise in tax and leasing; in leasing transactions, equity holders get the primary tax benefits. Caldon came to realise that infrastructure deals looked strikingly like tax-based leasing, but that the tax implications were much larger in infrastructure because the long construction period led to massive interest deductions, and the government encouraged tax-advantaged private investment through infrastructure bonds.

30 When it did list, performance was initially bleak as traffic failed to live up to projections. That wouldn’t last: eventually the whole motorway would have to be widened to an extra lane to meet demand.

31 The 1994 report refers to a $155 million equity commitment to support the successful bid for the Hills Motorway Consortium for the M2. ‘This will be a landmark infrastructure transaction in Australia as it is the first project that has accessed the international equity market for substantial equity funding,’ it said. The same year, Macquarie became part of a consortium to advise the Victorian government on the restructuring of the Victorian electricity supply industry; closed debt and equity financing for Hydroco Consortium, with Transfield and others, to develop three hydro projects in NSW; and advised the Tasmanian Treasury on the sale of 25 per cent of Tasmania’s generation capacity to Comalco. Infrastructure work was gathering pace.

32 Ultimately, the funding involved two stapled securities—that is, inseparable—both issued by Hills Motorway Group, which represented the consortium. There were units in Hills Motorway Trust and Hills Motorway Ltd. The trust was managed by Hills Motorway Management, which was a wholly owned subsidiary of Macquarie Bank. The trust leased the land for the M2 from the Roads and Traffic Authority for a rental fee, whose payment was deferred towards the end of the concession period. 

The trust, in turn, issued inflation-linked bonds to create a debt financing source for the project.

33 Patronage assets are infrastructure assets which do not have a fixed contract but are exposed to public usage, such as tollways and airports.

34 This point is not unique to Hills, Moore says, nor even tollways, but more broadly the privatisation of Western governments following the reforms of Thatcher and Reagan in the UK and USA, and Hawke and Keating in Australia.

35 The deal was one of Asiamoney magazine’s deals of the year in 1994, reflected with some pride in Macquarie’s 1995 annual report. More than just a listing, it was an IPO incorporating stapled securities, returning pre-tax cash flow to investors, infrastructure bonds, inflation-indexed bonds, annuity bonds, and bearing construction risk, Salisbury points out.

36 ‘A hit to profits’ was not quite the same in Macquarie as anywhere else: the 1995 financial year, to which Moss is referring, was still a record on an after-tax basis at $76.1 million, though lower on a pre-tax basis at $70.2 million.

37 The market cap on the first day was A$959 million. At the time of writing it is hovering around A$70 billion, having been as high as A$80 billion.

38 ‘Instos’ is an Australian shorthand for institutional investors. Australians are capable of abbreviating more or less any institution or concept by adding an O to the end of it.

39 In many cases these assets were held through other vehicles. So, for example, the M5 stake was actually in its toll road project operator, Interlink, a 50 per cent stake which cost A$61.6 million in 1996. The investment in the Eastern Distributor was through a 68.4 per cent, A$143.1 million investment in Airport Motorway Group, which was developing the road.

40 Peter Salisbury, who reveres Caldon and is determined his contribution be remembered after Caldon’s February 2021 death, says that ‘establishment of the infrastructure funds business was Caldon’s greatest gift to Macquarie as the funds have generated tens of billions of dollars of revenue’.

41 The model was not completely new. Mike Fitzpatrick, a former captain of the Australian Rules football team Carlton, had founded Hastings Funds Management in 1994 and used a listed infrastructure fund called Utilities Trust of Australia. The same year, Lloyd Morrison, a New Zealand investment banker, launched the listed infrastructure fund Infratil on the New Zealand Exchange, investing in Trustpower and later Wellington Airport. Transurban was different again, formed in March 1996 originally as the operator of CityLink and founded by Transfield Holdings and Obayashi Corporation as consortium members on the bid for that asset. It was permitted to undertake other activities from 2001 and, among other things, would go on to acquire Hills Motorway Group from Macquarie vehicles in 2004–05. 

ITA Group would technically be managed by a subsidiary called Macquarie Infrastructure Investment Management.

42 Solomon took a crack at decoding the total fees in his book, The Promise and Perils of Infrastructure Privatization: The Macquarie Model. Macquarie Infrastructure Investment Management Ltd, manager of ITA Group, would receive an annual management fee of 1.25 per cent of the fund’s net investment value plus a performance fee equal to 15 per cent of the annual return of the ITA Group above a benchmark index. In 1997 and 1998, Solomon says, ITA group paid base fees of A$2.42 million and A$6.23 million respectively, with performance fees of A$5.94 million in both of these fiscal years. MIIML also received 18 million ITA Group stapled securities. Another subsidiary, Macquarie Underwriting Ltd, received an underwriting fee of 2 per cent and a lead manager fee of 1.33 per cent of the total amount raised by the ITA Group in its IPO, which Solomon puts at about A$10.8 million. Then Macquarie Bank received interest on the loan it provided to ITA Group to fund the acquisition of the equity interest in Interlink Roads; Macquarie Corporate Finance Ltd received advisory fees from the Airport Motorway Group, for its work on the Eastern Distributor; and later Macquarie Underwriting got another A$2.6 million as underwriter and lead manager for ITA Group stapled securities under a rights offering that was held in October 1997. 

There are a few others, such as letter of credit fees and interest payments. But even without allowing for the stapled securities the manager received, we’re already at over A$34 million by the end of 1998.

43 Some sample earnings disclosures for Bill Moss: 2005, A$15.1 million; 2007, the year when he retired, $30.6 million, including long-term employee benefits.

44 Facioscapulohumeral Muscular Dystrophy.

45 https://www.walkercorp.com.au/about/our-story/

46 Assets included the Dreamworld adventure park and d’Albora Marinas.

47 Macquarie offloads Lime taxi business (smh.com.au).

48 The Macquarie CountryWide Trust raising tapped primarily retail investors.

49 That fund alone would manage more than US$3 billion in assets by 2006, spanning Hong Kong, Korea, Japan,China, the UK, Italy, the Netherlands, Belgium, Switzerland, Germany, France and Poland.

50 It did so on Macquarie CountryWide Trust, Macquarie Office Trust and Macquarie Industrial Trust.

51 Greg Norman has become a more controversial figure due to spearheading the LIV golf tournaments and taking on the PGA Tour establishment.

52 Medallist is first mentioned formally in the 1998 Macquarie annual report.

53 Fehon’s family accompanied him in the move.

54 Norman was born in Mount Isa in regional Queensland and spent most of his formative years in Townsville, a gateway to the Great Barrier Reef.

55 ABN AMRO Rothschild, Credit Suisse First Boston and JBWere the joint global coordinators, while Goldman Sachs and Credit Suisse joined Macquarie as joint lead manager on the US portion.

56 https://www.nytimes.com/2016/03/03/business/dealbook/goldman-sachss-eric-dobkin-father-of-modern-ipo-to-retire.html

57 There were two other unlisted entities: the High Yield Infrastructure Debt Trust, which had been launched in August 1997, and Horizon Energy Investment Group, through which ITA and some private investors held a 25 per cent stake in Loy Yang A. 

As it happened, this last vehicle would occupy most of Kahn’s first months in his role because of a turn of events that illustrated the perils of investment in some types of infrastructure assets. When the power industry was privatised in Victoria, forecast power prices were around A$39 per megawatt hour. But within a few months of the private sector taking over Victoria’s power stations (there were two others that changed hands in the same process) the new operators were too successful for their own good, creating so much more power than previously that the power price dropped to A$15 per megawatt hour. Horizon ended up selling its stake for about 10 per cent of the amount it had invested.

58 The Cross City Tunnel isn’t actually a Macquarie deal: equity was provided by Cheung Kong Infrastructure, DB Capital Partners and Bilfinger Berger BOT, while the debt was financed through a syndicate led by Westpac and Deutsche Bank. It did not get the tolling numbers it expected, became insolvent and was later bought by ABN Amro and Leighton contractors, only to go into voluntary administration again six years later. Since 2014 it has been run by Transurban. But from Carr’s perspective, all of this ‘meant nothing to the taxpayer. No subsidy was required from them, and that’s how the principle was supposed to be applied: the risk was shifted from the public to the private sector.’

59 Led by Cheung Kong Infrastructure Holdings and including DB Capital Partners and Bilfinger Berger BOT BmbH.

60 Its correct title, the scourge of sub-editors for the remainder of its existence, was BT Alex. Brown, which had been formed the previous year from the merger of Bankers Trust and Alex. Brown & Sons. The full stop after Alex is deliberate.

61 This was the Australian arm of a large US bank that had been rescued by Bank of America, which sold the Australian assets to Macquarie.

62 It was a little more complex than that: Deutsche sold the Australian division in its entirety to Principal Financial Group, which simultaneously onsold the investment banking division to Macquarie.

63 Moss adds: ‘book value was kind of irrelevant to us because it was all liquid securities anyway.’ In other words, the deal didn’t come with some building they didn’t want, but a lot of people and a book of good quality financial assets.

64 There was a secondary benefit from Bleach’s point of view. Whenever he’d been previously approached by his friend at Macquarie, Peter Curry, to cross sides, Bleach was always put off by the psychometric test at Macquarie. The BT takeover waived that requirement, giving him a ‘back door listing’, as he puts it with a smile, into Macquarie without having had his psychometric composition investigated.

65 Bill Best remembers BT staff talking about this speech later. ‘It was a classic Allan self-deprecating speech. He managed to knock something over. People really warmed to him.’

66 From A$9.5 billion at the end of the 1999 financial year to A$27.6 billion at the half-year before dropping back to A$23.4 billion at the end of the 2000 financial year. BTIB accounted for $11.9 billion, and the consolidation of Macquarie Life’s statutory funds that year because of new accounting standards also had an impact. The later reduction was down to reduced repurchase and securities positions, run-off of non-core BTIB assets and the securitisation of A$310 million of residential mortgages written by the bank.

67 The capital adequacy ratio stayed at 18.4 per cent, and Tier 1 at 14.5 per cent. The 2020 financial year included a placement of A$100 million of ordinary shares, A$150 million of converting preference shares, and a prospectus issue of A$400 million of ASX-listed Macquarie Income Securities. The offshore funding program was expanded from US$1 billion to US$3 billion.

68 The office relocation project, completed in March 2020, included the fit-out of 28,000 square metres at 1 Martin Place and the refurbishment of 25,000 square metres at 20 Bond Street. During the project 2300 staff relocated to 1 Martin Place and 1600 staff moved within Bond Street. Over 450 BTIB staff had been relocated to a Macquarie office by the end of October 1999.

69 According to the AFR, 27 July 1999, Macquarie had an 85 per cent success rate in recruiting key staff from BTIB, with 450 recruits out of 530 offered among 905 staff; 146 joined from sales and trading, 103 from operations and control, 55 from equities, 27 from corporate advisory, 30 from finance and fifteen from international investment banking, plus 90 in IT. These numbers add up to more than 450 due to some double-counting between divisions. 

However, out of the eleven members of the BT management committee, only two joined, investment bank chairman Rowan Ross and corporate adviser Michael Cook, with Peter Warne and Gavin Walker staying in consultancy roles. Tony Aveling, Rob Morrison, Rodney Payne, Dominic Stevens, Len Mackinnon, Ian Moore and Steve Gilsenan did not move across. https://www.afr.com/companies/macquarie-denied-cream-of-bt-crop-19990727-k8ufj

70 That is, a book of business related to gold bullion trading.

71 A kill disk is used to erase hard drives.