It has to be one of the biggest conflicts of interest and rorts going in corporate Australia, but Macquarie Infrastructure Group shareholders just don’t seem to mind getting massively ripped off by the millionaire factory.

Not quite.

MIG is made up of a labyrinthine company and trust structure comprising a couple of Australian trusts, a UK company and the “responsible entity” for the trusts, Macquarie Bank.

If I were a unitholder, I’d be pretty concerned that the Tax Office would come crawling all over the group when your Chairman and your Managing Director both say on several occasions that “we can’t simplify the structure for tax reasons” or “we have to do things this way for tax reasons”.

This mob has a tax avoidance case staring them in the face if the head honchos keep up these indiscrete comments.

But the biggest worry in this group are the fees that the Macquarie Bank rip out of it for their services provided as the “responsible entity” for the trusts. Incredibly, none of the MIG’s “intelligent shareholders” saw fit to question this at the AGM.

This reporter arrived about half an hour late to the AGM so missed the early part of proceedings, but apparently it was only procedural matters in any event.

Having sat through a lot of congratulatory questioning, I decided to pipe up about the exorbitant fees that were extracted by Macquarie Bank from the MIG.

I apologised in advance to MD Anthony Kahn if my question had already been asked before it hadn’t as I’d missed the early discussion, but queried how they justified the $72.6 million “performance fee” paid to Macquarie Bank. The annual report noted that this fee is “calculated with reference to the security price of MIG” but gives no other hints as to how this calculated. I pointed out that MIG’s net result (of $69.4 million) would have been more than doubled if not for the “performance fee” and that the statement regarding calculation of the fee indicated that the fee bore no relationship to work done or costs incurred by Macquarie Bank. The fee could go up from year to year without Macquarie Bank doing anything more, simply on the basis that the value of MIG had increased. I suggested that this seemed a wee tad too high and perhaps MIG might consider re-negotiating it.

Frankly, MIG unitholders those “intelligent” people should have been up in arms about this, but obviously nobody could give a toss. They are being taken for a ride and are blissfully unaware.

Macquarie Bank already holds 23 million stapled securities in MIG and reaped $2.1 million in distributions during the year (out of a total of $51 million in distributions), but still harvested a $72.6 million “performance fee”! And this was to be paid out of a net cash inflow for the year of $101 million.

It was unbelievable that MIG’s unitholders should have no qualms about the quantum of this fee.

The MD thought that the performance fee was “fair”, it was calculated by all the stakeholders when MIG was set up in 1992 and over the “cycle” (one of those annoying buzzwords that Execs like to drop to explain an inexplicable one-off result) the amount would smooth out. The performance fee was designed to give Macquarie Bank an incentive to ensure the performance of MIG. But surely their 23 million stapled securities would provide incentive enough?

If I were a betting man, I’d bet that it will be ludicrously high again next year and Australia’s notoriously passive institutions will continue to sit back and cop it.

The other part of MIG’s performance that is a concern is the fact that a large part of the entity’s result comes from Asset Revaluations. While this is not necessarily a “phoney” gain it is based on expected returns from toll roads where MIG has fixed contracts it is an unrealised increment based on discounted cash flows, so it could just as easily turn if interest rates go up.

Without wanting to play Nostradamus here, it is hard to see interest rates going much lower, so in future years unitholders should be bracing for revaluation decrements. No doubt MIG’s “intelligent” unitholders have already factored this into their investment decisions.

This is a nightmare waiting to bite investors in the never-you-mind and we can’t wait to hear the incredulous outrage when the asset revaluation policy turns the wrong way for MIG.

A large part of the meeting was dedicated to resolutions to alter the various entities’ constitutions. MD Kahn then turned on a video presentation of a whole lot of punters from around the world telling us how much they love their toll roads and how grateful they are to MIG for improving their lives.

Other than that, it seemed MIG was filled with content unitholders who had achieved a very healthy return on their investment. MIG runs a very profitable business but the return to investors could be a lot higher if not for the Macquarie Bank “performance fee”. The performance fee seems like a rort and if unitholders are not all over this in the future they will continue to be taken for a ride courtesy of the Millionaire Factory.

Unfortunately for MIG, it is probably performing too well to generate any meaningful unitholder scrutiny. It seems to have its house in order, so there is probably no reason for concern at this stage, but wait for the finger-pointing when the tide turns.

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