Macquarie Group's infrastructure arm might be beginning to face many of the same challenges that are affecting the world's equity fund managers but, as one analyst pointed out, the three preconditions that make the business ‘hum’ are all in place.
According to CLSA’s Brian Johnson, Macquarie Infrastructure and Real Assets (MIRA) arm needs opportunistically-priced infrastructure assets, access to cheap non-recourse debt and the capacity to raise fresh Equity Under Management.
In a client report, Johnson pointed out that governments are running deficits but need to supply public infrastructure.
“Central banks around the world now suggesting interest rate cuts are less effective so we see policy pivot to private / public investment in infrastructure,” he said.
And in terms of MIRA being able to raise debt to gear up the EUM to buy assets, he argued there is a there is still a lot of global QE sloshing around the world and global system credit growth is insipid, so it’s still easy to access debt.
Also, the analyst noted that as of March, Macquarie’s MIRA business had $10.2 billion in undeployed cash EUM out of total EUM of $77.2 billion.
“If you gear up that cash you get $18 billion of AUM buying power, which increases AUM by12 per cent,” he calculated.
More to the point, he said, MIRA is still raising EUM as pension funds look for long duration assets to match long duration liabilities.
“Remember the yield on infra is more akin to an inflation-linked bond than a pure bond - have you noticed Sydney airport parking fees always rise,” he reminded clients.
“That said MIRA does face a near-term performance fee void as we roll from the Macquarie European Infrastructure Fund 1 (2004 €1.5 billion) to Macquarie Infrastructure Fund2 (2006 €4.5 billion) given MEIF1 was phenomenally successful whereas MEIF2 was investing in the run-up to the GFC.”
However, funds established post MEIF2 are likely in great shape given they were investing when bond rates are a lot higher than they are today.
In any case, Johnson thinks the MEIF1 to MEIF2 performance fee void can easily be bridged by IPO realisations in Macquarie Capital such as forensic software company NUIX, Property Exchange Australia (PEXA) and Quadrant Energy.
“These will be spread over four years in line with the three to four year earnings-per-share growth/return-on-equity vesting conditions of Macquarie’s executive performance share units."
Johnson’s view of MIRA is a lot more upbeat than the one floated a fews ago by Citi analyst Craig Williams who thought high asset prices, the low likelihood of large future performance fees, “dry powder” of uninvested capital and a move to passive investing would make it hard for MIRA to drive the next wave of earnings growth for Macquarie Group.
Williams said the infrastructure business accounted for only about 10 per cent of Macquarie’s revenue base, but that it had been “one of the most important cogs in the success of this profit cycle”.