Macquarie Group, the world’s largest infrastructure manager, could be forced into a fire sale of assets as it comes under pressure from rising interest rates, high levels of debt and stalled earnings, according to Citi. Despite booking a record $2.2 billion profit last year, Macquarie’s earnings have been coming under increasing pressure. The growth in profit last year was largely driven by paying a lower tax rate and the lowest rate of souring loans in six years, as revenue streams were fairly flat. Citi analyst Craig Williams said Macquarie’s infrastructure and asset management arm, which has more than $90bn worth of funds invested in assets such as toll roads and airports around the world, could be the sole source of future growth for the company as other businesses stalled.
Mr Williams said a number of factors such as high asset valuations, the low likelihood of large future performance fees, and a rush away from active asset management towards passive funds meant Macquarie’s bull run was probably over. “While Macquarie Infrastructure and Real Assets is a world-class business, the revenue outlook is unlikely to drive the next wave of earnings growth for Macquarie Group,” Mr Williams said. “Macquarie may need to continue to realise assets to support near-term earnings, until the next wave of growth emerges,” he said. “After this current asset realisation period is over, we expect a decline in both earnings and share price for Macquarie.” Although the infrastructure arm accounts for only about 10 per cent of Macquarie’s revenue base, Mr Williams said it had been “one of the most important cogs in the success of this profit cycle”. Growth in the company’s core businesses has stalled.
In the largest division, asset management, assets under management and fees appear stuck at the same levels for the last three years. In the corporate and asset finance division, which houses the company’s bond holdings, lending assets and revenues are falling. Macquarie’s commodities and markets business booked falling revenues for both commodities and equities operations. Macquarie Group’s pre-tax profit levels have gone well above the last cyclic peak, reached just before the global financial crisis, when profits sank. A Macquarie spokeswoman said the company did not “provide forecasts” for the business, but said the infrastructure arm had “been able to generate approximately 50 basis points of equity under management in performance fees per annum” through the economic cycle. “Macquarie believes that it is well positioned to continue to grow in the real asset market given its experience, long track record of delivering strong returns to investors and its global network.”
But Mr Williams said the environment that had allowed the group’s infrastructure business to flourish looked likely to be drawing to a close. Record low interest rates pushed investors to pour billions into infrastructure funds for higher yields. Now, signs of reflation have equity markets rallying, which is likely to leave infrastructure as an underperformer. But instead of investing with active managers, such as Macquarie, investors are moving towards passive management, attracted by lower fees and outperformance. Mr Williams said the infrastructure arm was now “potentially facing the same challenges that the industry faced in 2008” before the global financial crisis. He said infrastructure managers had loaded up on debt to support high valuations in investments in periods of low interest rates. “These valuations have now reached levels that are becoming a concern,” Mr Williams said.
As managers become wary of high valuations, they leave cash on the sidelines. Macquarie’s “dry powder” of uninvested capital has tripled over the past four years. Most infrastructure funds are also not designed to collect base fees until the capital is fully deployed. Macquarie has been looking to emerging markets for assets with lower valuations than in developed markets. The group’s portfolio of companies in Asia has doubled in the past three years to about 70 major investments. Mr Williams said the ability of Macquarie’s infrastructure arm to support the broader group would depend on its ability to attract money to new funds, earn performance fees and grow base fees. This would be hard to do in the changing environment, he said.
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