Macquarie's pioneering funds model under pressure

By Denny Thomas and Mette Fraende

SYDNEY (Reuters) - Australian investment bank Macquarie Group Ltd (MQG.AX) has managed to quell concerns on its capital position but is now bracing for its next big challenge of the global credit crisis: how to prevent its world-renowned specialist listed-funds model from crumbling.

Macquarie pioneered the specialist listed funds model in the early 1990s, encouraging even some Wall Street investment banks to follow suit. Fees from managing specialist funds made up 13.3 percent of Macquarie's total income in the year to March 31, 2009.

But a meltdown in global asset values has raised doubts about the survival of the listed funds business model itself. On Tuesday, shareholders in Macquarie Communications Infrastructure Group (MCG.AX) approved a $1.3 billion deal by Canada Pension Plan Investment Board to buy Macquarie Communications.

And last week, Macquarie Leisure Trust Group MLE.AX, one of the smaller funds, cut its ties with Macquarie Group by paying A$17 million ($14 million) to the bank.

Those moves have sparked talk that more from Macquarie Group's stable of about 15 such listed funds may follow suit and break away as they aim to save fees and do a better job than the bank in managing the funds.

"Macquarie Infrastructure Group could be a candidate for that, possibly Macquarie Airports as well," said Tom Elliott, managing director of MM&E Capital, a hedge fund that takes positions in announced M&A deals.

"Those are relatively better-performing funds and it would cost a fair bit to do it. But still, it's possible," Elliott added.

Deutsche Bank estimated in a report last week that Macquarie Group would suffer a net A$33 million loss if 50 percent of all listed funds were to throw out Macquarie as the manager.

STRETCHED THIN?

Using cheap debt, Macquarie Group bought infrastructure assets around the world and bundled them into listed and unlisted funds. The bank earns base fees as a manager of assets and gets performance fees if the funds beat benchmark indices.

Macquarie Group's listed and unlisted funds jointly manage A$160 billion in toll roads, airports, real estate and others. Macquarie Infrastructure Group (MIG.AX) and Macquarie Airports (MAP.AX) are the top two.

Macquarie Group earned A$921 million in total base fees from managing funds in fiscal 2009. The model worked, until the credit crisis hit.

Besides dwindling fees, falling asset values also mean Macquarie Group is carrying about A$2.0 billion in unrecognized mark-to-market losses on its book, CLSA Asia-Pacific Markets estimates.

"Macquarie probably has the leading skills in infrastructure. But it extended that into real estate, media and leisure...and I am not sure if it worked," said Rob Patterson, managing director of Argo Investments Ltd, a long-term Macquarie Group shareholder. A Macquarie Group spokeswoman declined to comment on Macquarie Leisure's move and referred to its previous statement.

"Macquarie notes that a number of its major specialist listed funds have stated they are reviewing a range of further initiatives...ensuring an appropriate capital structure...," Macquarie Group said in March.