Why Macquarie manages infrastructure funds

03 March 2006

The Sydney Morning Herald and The Age on 1 March 2006 published an article by Mr Alan Kohler on Macquarie Bank Limited and its infrastructure funds business.

The article asks why investors should continue to pay fees to Macquarie to manage their infrastructure assets.

What value does Macquarie add?

Macquarie believes it has demonstrated its value by providing investors with an average annual compound return of 19.4% across its managed infrastructure funds over an 11 year period. This return has not been earned on a small pool of capital but on many billions of dollars of equity in many different jurisdictions over many years.

It is this remarkable track record over the long term which should be the relevant measure in assessing the performance of a fund manager. The largest beneficiaries of this performance have been the tens of thousands of retail and wholesale investors who have supported Macquarie over these years.

Had performance fees not been paid, the annual compound return to investors would have been 1.1% more, that is, 20.5%. It is questionable, however, whether the same outstanding results would have been achieved without the incentive provided by the performance fee structure.

Are Macquarie’s fees “out of line” with the market?

Macquarie is an active manager of its infrastructure funds. It works with asset level management on an ongoing basis to improve the operating performance of the assets and the levels of service delivered to customers. Macquarie is also responsible for ensuring that the capital structure of the assets is appropriate and provides the best possible return to equity investors in the funds. Macquarie’s infrastructure funds business has over 400 executives who conduct this active management.

The base and performance fee structure is not unique to Macquarie managed funds. It is commonly used around the world in externally managed funds involved in sourcing, acquiring and managing large and complex assets, whether those funds be infrastructure funds, private equity funds or hedge funds. The reason it is in such common use around the world by many different organisations, and has been for many years, is that it is the most accepted, clear and transparent way of aligning the interests of the investor with the interests of the manager. As well as being in line with market practice, the fees are agreed up front with investors and are fully outlined in offering documents.

Relevant market fee benchmarks include:

• European and US infrastructure, private equity and hedge funds operate with a base fee of between 1.5 to 2.5%pa of funds under management (usually around 2.0%) and an outperformance fee of 20% in excess of a hurdle, usually fixed at 8%
• A number of asset managers are actively marketing or considering infrastructure fund offerings with fees structures of 1.5%pa (base fee) and 20% (performance fees over a hurdle)
• Existing externally managed (non-Macquarie) infrastructure fee structures vary but many of the more recent funds have base fee and expense recovery mechanisms which put the effective cost of annual base fees well over Macquarie’s level of base fees.

The Macquarie managed funds model has received endorsement from a range of domestic and international institutional investors through their participation in the last 15 months of over $A8.5bn of capital raisings in Australia, Singapore, Korea, Canada and the United States.

The base management fee average of 1.8%pa quoted in the article for the Macquarie Infrastructure Group (MIG), Macquarie Airports (MAp), Macquarie Communications Infrastructure Group (MCG) and the NYSE listed Macquarie Infrastructure Company (MIC) is not correct. The actual base fees payable by these funds based on their current net investment value (NIV)[1] are 1.1%pa for MIG, MAp and MCG, and 1.5%pa for MIC.

Would deal flow be the same with an internal manager or a non-Macquarie manager?

Macquarie believes that its ability to generate value accretive infrastructure investment opportunities is unrivalled in the global market place. Macquarie has acquired a portfolio of 100 assets for its infrastructure fund investors; no other fund manager or entity, whether externally or internally managed, has been able to provide that level or quality of deal flow.

Macquarie’s ability to identify opportunities, value those opportunities and move quickly to execute transactions,  together with Macquarie’s active management of the funds and other initiatives leads to distribution growth in the funds.  For example:

• MCG paid a distribution of 29.0 cents per security in 2005. It acquired Arqiva (formerly NTL Broadcast UK) in February 2005 and raised its distribution guidance to 39.0 cents per security for 2006.
• MAp paid a distribution of 20 cents per security in 2005. It invested in Brussels Airport in December 2004 and Copenhagen Airport over a period from December 2004 and then raised its distribution guidance to 25 cents per security in 2006.
• The Singapore listed Macquarie International Infrastructure Fund (MIIF) paid a distribution of 3.10 cents per security for the 6 months ended 31 December 2005. It acquired 3 assets in the second half of 2005 and raised its distribution guidance to 3.95 cents per security for the 6 months ending 30 June 2006.

Are Macquarie managed infrastructure funds under-performing?

The average annual compound return to investors of 19.4%[2] over an 11 year period by listed and unlisted Macquarie managed infrastructure funds has already been discussed.

Since inception, the performance of the listed Macquarie managed infrastructure funds has significantly exceeded the returns across world equity markets:

Correction of other statistics in the article

The article states that “In 2005 base and performance fees from the funds totalled $700 million, close to 20 per cent of total revenue and 86 per cent of net profit”. The $700m was earned from all Macquarie managed funds (ie including property funds) and not solely the Macquarie managed infrastructure funds as implied. It is incorrect to state that this $700 million of revenue equates to 86% of Macquarie Bank’s $823 million profit after tax for the year ended 31 March 2005, as this ignores the expenses and tax payable by Macquarie Bank on this revenue.

The article states that “$200 million in fees was apparently paid for the APRR transaction”. It should be noted that this number represents the total fees paid on this transaction to all advisors including lenders, accountants and lawyers. Only a portion of these fees were paid to Macquarie Bank. The article does not mention that the enterprise value of the APRR transaction (involving the third largest tolled motorway network in Europe) was A$19.3bn, of which the total fees represent 1%, which is well within the market norm for transactions of this size and complexity.

Media Enquiries:
Matthew Russell
Head of International Public Relations
61 2 8232 4102
0410 699 532

Investor Enquiries:
Stephen Mentzines
Executive Director
Macquarie Infrastructure and Specialised Funds
61 2 8232 7962