Mig Recipe Lures Some, But Others Are Sceptical
Sydney Morning Herald
Saturday March 23, 2002
Why is some of the smart money staying out of Macquarie Infrastructure? Brian Robins reports.
One of the oldest saws in the sharemarket is don't buy shares in a company you don't understand. For many investors, that can be refined to not buying shares in companies whose accounts you don't understand.
On this basis, some of the smartest money in town, such as Perpetual Investments, has consistently sat tight whenever Macquarie Infrastructure Group comes shopping for funds.
Even so, one of the biggest single investors in MIG, Colonial First State with 20 per cent of the capital, remains an undying fan.
That stake has been a boost to Colonial First State's investment performance over the past few years, as shares in MIG finally achieved some traction after the group's disastrous early few years as a public company.
By the end of the week, after raising another $800 million from the market, MIG was valued at a handy $6.3 billion. This marked a three-fold rise in a little over two years and pushed it comfortably into the top 25 listed companies. MIG closed in on its manager, Macquarie Bank, in the process.
Yet few in the market profess to understand MIG's accounts. Listed investment companies know minute by minute the market value of their share portfolios. With MIG, investors have to put their faith in the assumptions of its manager, Macquarie Bank, about the investments held risk factors, discount rates and the like. This opaque process can be abused.
In the December interims, for example, half of MIG's ``revenues" were valuation updates of its myriad investments, with the balance split between interest and investment income.
Supporters argue that watching the cash is all-important.
``You really have to follow the cash," says Colonial First State's incoming head of Australian Equities, Ian Harding. He replaces Greg Perry, who steps aside mid-year. ``There's revaluations, but there is also depreciation.
``The key is to watch the free cash flow after financing. That determines the value, as these assets eventually revert to the Government."
Harding was one of the first fans of MIG, doing a lot of the early analytical work on it, and was behind Colonial First State's big play in MIG stock. The MIG exposure paralleled sizeable stakes in Transurban and Hills Motorway.
When MIG launched its $1.7 billion share issue last September, equal to 50 per cent of its market value at the time, Colonial First State signed on as a sub-underwriter. Its shareholding rose as high as 23 per cent at one stage.
It is extremely unusual and potentially very risky for a fund manager to build up such a big exposure to a major public company, more so for a top 20 company, which MIG is on the cusp of becoming. But as a true believer in the toll road story, Colonial has had little difficulty stepping up to the plate.
``MIG's growth has been outstanding," Harding says. ``It has demonstrated an ability to grow assets by acquisition. It has an extremely strong pricing mechanism and has been able to raise capital at good prices and then deliver a rerating."
According to Colonial, MIG has risen 110 per cent since April 1999, outpacing Macquarie Bank's 76 per cent gain.
``You've got to feel pretty happy that a stable, secure, almost boring asset has grown faster than the bank itself in terms of share price," Harding says.
But as interest rates begin to tighten, many analysts are advising clients to shift their funds elsewhere because higher interest rates will pressure the value of MIG's assets.
``I dismiss that," Harding says. ``Higher interest rates means that a higher discount rate is used when calculating the net present value.
``But rates rise to head off inflation. All [toll road] concessions have CPI protection, the ability to increase revenues at the rate of inflation.
``One of the UK concessions is unrestricted if the economy is strong, why not put the rate up at the rate of growth?"
Harding concedes he is yet to win this debate, although MIG's performance through the tightening rate cycle may provide the proof he expects.
MIG will go to its small investors in the coming weeks toraise nearly $300 million of the $1 billion it is seeking overall. Elsewhere in the Macquarie Bank group, it yesterday closed the raising of the first half of the$1 billion sought for the Macquarie Airports float ahead of other issues such as a communications infrastructure fund which will be formed around the $850 million purchase of NTL Australia's broadcast infrastructure assets.
Offshore, along with the possibility that Macquarie Airports Group will raise further funds, a fund is to be launched in North America following the earlier acquisition of Transalta's electricity transmission network.
Macquarie Bank generates substantial bonus payments if MIG outperforms, and has created a web of other companies in the same mould, mostly in the property sector.
Its property trusts include Macquarie Goodman, valued at $340 million, Macquarie CountryWide ($620 million), Macquarie Leisure ($100 million) and Macquarie Office Trust ($920 million). Some, such as Macquarie Leisure, are still best described as start-ups, although others are beginning to hit their straps.
``Property trusts are great at aggregating assets and many companies have external management, the same as with MIG, but it has an extremely strong incentive to manage to outperform," Harding says. ``That is what has attracted us. I'm a champion of performance-based reward."
That strong MIG performance saw it pay performance fees of over $72 million to Macquarie Bank last year alone, and more is due. All up, in 2001, Macquarie Bank banked fees of over$113.5 million from MIG.
Macquarie Bank is aggressively rolling out its MIG formula in the property and infrastructure sectors, although neither have achieved as much traction as MIG.
That aggression is clear enough more than $4 billion has been raised by Macquarie Bank and affiliates via the local sharemarket in the past six months alone, accounting for probably around half of all sharemarket raisings.
These include Macquarie Airports's $1 billion initialpublic offer, Macquarie Bank's $500 million placement and MIG's raising of $1.7 billionlast September and another$1 billion now.
But despite the optimism in some quarters, launching specialty investment funds around these types of assets is not a lay-down misere to make money for the managers or the investors.
Just look at AMP, which sank $US165 million into Oregon-based WCI Cable. It collapsed in mid-2001 along with its Alaskan subsidiary, Alaska Fibre Star.
© 2002 Sydney Morning Herald