Letter to the Wall Street Journal Asia in response to article on 5 July 2011

We refer to your article “Macquarie struggles with focus” by Cynthia Koons (WSJ Asia, 5 July 2011).

The premise of the article is that Macquarie, a former infrastructure “champion” is now struggling on a “road to reinvention”.  This is wrong in both respects.

Rather than Macquarie being on a “road to reinvention”, the Group was, long before the financial crisis, on a path of diversity and growth and remains so.  Since inception in 1969, the compound annual growth rates for net profit after tax and staff numbers are 31.4 per cent and 22.6 per cent respectively.  In that time, Macquarie has grown its operations from one Australian office to offices in more than 28 countries.

Your reporter refers to Macquarie’s share price without reference to global market conditions which are challenging for all investment banks.  Despite this, since 1 August 2007 - the onset of the global financial crisis - Macquarie has outperformed the MSCI World Capital Markets index by 10.5 per cent.

The starting point for the article is that Macquarie was over-reliant on its infrastructure business.  This ignores the publicly disclosed fact that as early as the year ended 31 March 2008, the Group’s specialist funds – while an important part of Macquarie’s business - were not more than 20 per cent of its total operating income.  

While being strongly diversified we nevertheless remain strong in the infrastructure sector.  While your reporter claims that Macquarie has moved away from managing listed infrastructure funds, she has chosen not to report that Macquarie continues to be the largest infrastructure fund manager in the world with assets in 23 countries.  Macquarie has recently closed funds in China, India, Mexico and Russia.

In addition, Macquarie’s advisory businesses continue to be market leaders in infrastructure in the US, Europe and the Asia-Pacific.  It was adviser to 83 infrastructure deals in the 2011 financial year, up from 68 deals in 2009.

The reporter makes particular mention of Macquarie’s activities in the US and raises the question of whether it can “make a mark” in that market.  Again, the article chooses to bypass key facts.  Notably:

• Operating income from the Americas has grown from 8 per cent of the Group’s total operating income in the year ended to 31 March 2009, to 30 per cent in the year ended 31 March 2011.
• Our funds management business in the United States continues to be successful, greatly assisted by the recent acquisition of Delaware Investments.  At 31 March 2011, Delaware Investments had assets under management of $US159 billion, an all-time high for the business and growth of more than $US25 billion since its acquisition was completed in January 2010.
• Macquarie’s energy markets division, which includes the Constellation downstream natural gas business that was acquired in 2009, is now the number four US physical gas marketer in North America.
• In FY2011, Macquarie Securities in the United States reported a 31 per cent increase in cash commissions on the prior year, reflecting continued improvement in client panels.  Macquarie Securities also increased its research coverage to over 500 stocks.
• Macquarie has developed a high-quality debt markets team in the US which, amongst other achievements, completed 15 debt capital markets transactions as bookrunner in the year ended 31 March 2011.
• Macquarie has added to its profitable Northern American leasing businesses, including the addition of a technology leasing business in 2007 and substantially increasing its operating lease business with the acquisition of a $US1.6 billion aircraft portfolio from International Lease Finance Corporation in 2010.

The reporter makes claims that Macquarie is losing ground in some of its “old core businesses”.  However, the reporter has selectively chosen league tables that validate this claim, rather than provide a balanced view.  For the record:

• The Thomson Reuters’ First Half 2011 Global M&A Financial Advisers league tables show that in Australia, Macquarie ranked number three for deals completed in the six months to 30 June 2011.  This is one rank higher than the prior corresponding period.
• In Asia (ex-Japan) the Thomson Reuters league tables for the first half of 2011 show that in terms of deals completed, Macquarie has moved up 21 places from its 2010 ranking to 18 for the first half of this year.
• In Australian stockbroking, which comprises both institutional and retail activities, IRESS data shows that Macquarie was ranked number three at the end of 2010 and maintained this position at 30 June 2011.

It is particularly disappointing that the reporter chose to ignore key facts and independent data which did not support her chosen assumptions.

The appendix below contains further factual material to provide a more accurate and balanced view of the Group’s activities.

APPENDIX

Claim: The article claims that Macquarie has failed to achieve a top 10 Australian M&A league table position in 2011.

Fact: Thomson Reuters’ First Half 2011 Global M&A Financial Advisers league tables show that in Australia, Macquarie ranked number three for deals completed in the six months to 30 June 2011.  This is one rank higher than the prior corresponding period.

Claim: In Asia (ex-Japan and Australia), Macquarie’s investment banking core revenue rankings had declined by 15 places between 2010 and the first half of 2011.

Fact: Thomson Reuters’ league tables for the first half of 2011 show that in terms of deals completed in Asia (ex-Japan), Macquarie has moved up 21 places from its 2010 ranking to 18 for the first half of this year.

Fact: It is misleading to refer only to announced M&A data, particularly in the current market where the difference between announced and completed transactions is more significant. Announced deals include all deals, irrespective of whether they reach completion or not. In the current environment, where deals are frequently being withdrawn, announced deal rankings become misleading.

Claim: Macquarie’s share of Australian stockbroking has fallen from 9.7 per cent at 30 June 2010 to 7.9 per cent at 30 June 2011.

Fact: At the end of 2010 and at 30 June 2011, Macquarie was ranked number three for institutional and retail stockbroking, according to IRESS.  By deliberately excluding part of our activities any comparison is misleading.

Claim: Macquarie’s stock price has dropped to levels not seen in more than two years.

Fact: Since 1 August 2007, the onset of the global financial crisis, Macquarie outperformed the MSCI World Capital Markets index by 10.5 per cent.  

Claim: The global financial crisis led Macquarie to refocus its business model away from infrastructure funds management into more traditional investment banking.

Fact: Macquarie has substantial fund management businesses, including significant unlisted infrastructure fund activities, which Macquarie continues to expand.  Unlisted infrastructure funds were recently launched in China, India, Mexico and Russia.  

Macquarie’s listed specialist funds, however, represented only a small part of the overall Group’s operations and earnings.  As noted in a statement made on 2 March 2009, included within the outlook guidance provided at the Macquarie Operational Briefing on 5 February 2009, it was estimated that the listed funds would provide less than 5 per cent of operating income before impairments for the Group for the year to 31 March 2009.

Macquarie continues to derive its operating income from a diverse range of activities including funds management, lending and leasing, commodities and fixed income products and trading, equities and the provision of financial products and services.

Claim: Macquarie Capital and Macquarie Securities have been the traditional “growth engines” for Macquarie.

Fact: This statement ignores Macquarie’s strong record of business diversity.  The Group has long-established businesses in fixed income, currencies and commodities, funds management, specialist leasing and finance and retail financial services.  In 2009, for example, 40 per cent of Macquarie’s operating income was derived from businesses that did not exist five years previously.

Claim: It is questionable whether Macquarie will be able to “make its mark” in US financial markets.

Fact: The Americas as a percentage of Macquarie's operating income was 8 per cent in 2009, 21 per cent in 2010 and 30 per cent in 2011, a strong performance in challenging markets and despite a continuing strengthening in the Australian dollar.  Notably:

• Macquarie Capital’s and Macquarie Securities’ financial institutions expertise was recognised by their joint bookrunning role on AIG’s recent $US8.7 billion offering, the largest follow-on transaction in the sector this year.
• Macquarie Funds Group continues to consolidate its position as a top 50 global asset manager.  At Macquarie’s full year results announcement in April 2011, it advised that the Macquarie Delaware business reported strong inflows and capital appreciation of around $US15 billion in FY2011.
• Macquarie has maintained its position as the No. 4 US physical gas marketer in North America according to Platts Gas Daily’s rankings.
• Macquarie has book run 15 DCM deals and nine ECM deals in the US in FY2011.

Claim: Macquarie is experiencing difficulty retaining staff in Asia.

Fact: Overall staff numbers have increased in Asia: in March 2010 Macquarie had 2,410 staff and as at March 2011 it had 2,834 staff.  In addition, Macquarie has recruited senior hires including key personnel in Japan.