Macquarie is sitting on more than $10bn in excess funds. The reason why is twofold. The Macquarie boss is ever ready to pounce on opportunities – these range from acquisitions if prices drop significantly or directing more into booming private markets.
The other reason for all this cash is insurance. Wikramanayake doesn’t want to be caught short if markets really crack on Donald Trump’s trade war.
During the early days of the financial crisis, Macquarie was thrown off balance, but it quickly tapped all the funding available to it, this allowed it to regroup and shortly after went on a major spending spree that delivered it a US wealth management stronghold through Delaware and a separate deal, Constellation, that supercharged its energy business. It also acquired other wealth and trading operations across Europe.
However, through Delaware,it was able to tap a new source of investor money to fuel its US infrastructure expansion. But Constellation became the driver of Macquarie’s commodities business.
Macquarie is just as ruthless too, last month it offloaded Delaware, which now manages $285bn, to Japan’s Nomura, sensing the structural boom in public markets is over.
Then through the Covid pandemic as most businesses were hunkering down, Macquarie launched an extraordinary hiring spree, adding thousands of bankers to drive more business around the world. Then as the Ukraine-Russian war broke out, Macquarie’s usually low-profile oil and gas trading business kicked into gear, generating hundreds of millions in profits.
Volatility
Even as things may seem relatively calm today, Wikramanayake is bracing for more volatility to come.
“We’ve seen the new US administration make some quite dramatic changes that could cause a fundamental rethink in terms of world order, on things like trade, and what that will mean for supply chains, the potential inflationary impact on it,” she says.
Trump’s actions are realigning trade blocks and exchange rates. Areas like security and defence are getting another look. She says no one knows how it’s all going to play out, with the negotiation phase of tariffs underway and the outcome between China and the US the big unknown.
She says there’s “no urgent plan” to go out and reposition Macquarie’s businesses, which she is confident are resilient.
“But the all of our global businesses will be watching, thinking about how we take advantage of the opportunity as well as managing the risks as well.
“What we do is we empower our teams on the ground to be saying in each of your areas where we do have deep expertise, and we see structural change happening, you come and tell us where you see the opportunity.”
This was the case in the very depths of the GFC when it snapped up then struggling US energy business Constellation.
Wikramanayake was speaking as Macquarie posted a 5 per cent lift in profit to $3.72bn. A bigger than expected lift in the second-half dividend to $3.90 drove a more than 4 per cent surge in Macquarie’s shares. The surge came even as the investment bank issued its trademark cautious outlook, and this time around put a little more emphasis on caution.
Around a third of Macquarie’s annual revenue now comes from the US. With some tipping a possible recession or at least dislocation, is that a vulnerability for Macquarie?
“We’re not a bet on the US economy,” Wikramanayake tells The Australian. Rather, she says the investment bank is deep in infrastructure and energy flows that continue regardless of US economic pace. Although, she concedes slower M&A activity will hit capital markets.
Macquarie too is changing with the times, it is down to just $1.3bn in wind and solar assets sitting on its balance sheet earmarked for sale, from around $2bn this time last year.
The economics of offshore wind is challenged, but prices for solar are holding up, the Macquarie boss says.
“The market for solar assets is strong. We’re still seeing a lot of portfolios change hands. Its construction costs haven’t rocketed. It’s a very competitive alternative source of power.”
However, it is clear the investment bank is being more selective in the renewable projects it is backing. These days private credit is the asset class getting all the attention from Macquarie, while investment in digitisation such as data centres and infrastructure has some way to go.
Macquarie model
The latest results show the Macquarie model in action. The more defensive and annuity-style asset management businesses headed up by Hong Kong-based Ben Way is booming. Earnings up 33 per cent on the year, largely driven by private market activity, including private credit, fee-driven income and asset sales including AirTrunk for $24bn last September, and more recently Macquarie Rotorcraft, a helicopter leasing business sold for around $US1.2bn.
It is closing in on $1 trillion in funds under management. There’s more of these big ticket assets likely to offloaded in the coming months.
To underscore the outperformance of asset management during slower times, Way during the year became the second highest paid Macquarie executive, taking home $20.6m. Although this was well short of Wikramanayake’s $29m.
Macquarie’s well regarded digital banking business remains another reliable performer during tough times, posting a steady profit of $1.38bn.
The more volatile markets-facing businesses that thrive on confidence, Commodities and Global Markets, saw earnings fall 12 per cent. This remains Macquarie’s biggest profit engine, generating more than $2.8bn in annual earnings.
Macquarie Capital, another markets business, which is also building up a proprietary private credit portfolio, saw returns fall 1 per cent.
For now, all the surplus cash sitting idle is weighing down Macquarie’s shareholder returns.
The investment bank is running at a return on equity of just over 11 per cent, which is more in line with a comfortable big four retail bank than a hungry investment bank. There’s only so long before investors want to see this move higher. However, Wikramanayake urges investors to focus on the average outsized returns through the cycle.
Nor is she fazed by the recent market crash or even a new wave of uncertainty to follow.
“I’ve been working 37 years now. We’ve been through a lot of cycles … We’ve been through all of them. And as you’ve seen, our earnings have continued to grow.”
johnstone@theaustralian.com.au
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These are the moments that make Macquarie. Amid all the corporate calm projecting from the investment bank’s sprawling new Sydney headquarters, Shemara Wikramanayake is cashing-up and ready to strike on the next transformational deal.