Macquarie’s Annual report released earlier this week confirmed a very curious and seemingly overlooked point – that is, Macquarie Bank has been a voracious buyer of securities in two of its largest satellites – Macquarie Infrastructure Group (the first offspring from the Macquarie Model) and Macquarie Airports (MAp).
Macquarie’s stake in MIG quadrupled – from 2 percent to 8 percent in the past year, after the bank went on a buying spree. Macquarie’s equity interest in MIG is now worth more than $600 million. The Millionaire Factory has an even more substantial stake in MAp, after the bank increased its holding from 16 percent to 20 percent in the last year. That means Macquarie Bank has more than $1 billion invested in MAp. (MAp is the publicly listed security which holds a majority interest in the unlisted Macquarie Airports Group – MAG).
The question arises – if Macquarie are such financial wizards, why are they investing hundreds of millions of dollars of shareholders’ funds in two satellites which own infrastructure assets? Presumably, shareholders purchase Macquarie Bank shares to profit from the ingenuity of the 13,000 staff who spend their days trying to come up with new structures to charge fees to people. If those Macquarie shareholders wanted to buy an airport, they could invest in MAp themselves.
Macquarie spent around $600 million buying MIG and MAp securities during 2008, so the logical question is why they would do such a thing?
The answer of course, is fees.
Under its constitution and Advisory Deed, MAp pays base and performance fees to a Macquarie Bank subsidiary. In 2007, MAp paid Macquarie a base fee of $75.4 million (but no performance fee, as its securities slumped in value). Contrary to what you may think, Macquarie’s management fee isn’t based on MAp’s revenue or even profit. Rather, according to MAp’s Annual Report, the management base fee payable to Macquarie is based on the volume weighted average market capitalisation of MAp over the last 15 days of each quarter (plus borrowings and cash).
In other words, the higher the share price of MAp, the more MAp pays to Macquarie as a management fee. (Similar applies for the “performance fee”, which also has a “fee deficit” function, giving further impotence for Macquarie to ensure that MAp’s share price doesn’t fall to far).
A similar situation occurs over at MIG. For the half-year ending December 2007, MIG paid Macquarie management fees of $36.6 million (pretty hefty, given the company only collected toll revenues of $68.6 million for the period) and no performance fees. The management-fee payable to Macquarie is also based on the market capitalisation of MIG. The effect of Macquarie increasing its stake in MIG from 2 percent to 8 percent was that it directly increased the management fee that MIG security holders paid Macquarie. (On top of management fees, MIG also paid around $27 million in underwriting and advisory fees during to Macquarie during FY2007).
Macquarie’s buying of MAp and MIG shares during 2007 had the direct effect of increasing the management fee that MAp and MIG security holders paid Macquarie – regardless of how good a job Macquarie was doing managing the assets. This is simply outrageous and is a key reason why both satellites continue to trade below their net tangible asset value.
If this isn’t bad enough, as Stephen Mayne has noted, the unlisted Macquarie Airport Group – MAp’s parent company also paid to Macquarie performance fees of $147 million last year.
One wonders exactly what substantial MAp shareholders including US-based fund manager Capital Group, AXA and Swiss-bank Julius Baer must be thinking as their investment in the company is frittered away to Macquarie in management and hidden performance fees.