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Stephen Bartholomeusz is a smart man....great article...go the offshore punters!!!

http://www.theage.com.au/news/business/offshore-punters-seem-to-be-as-gungho-as-ever-about-the-macquariemodel/2006/05/16/1147545327063.html?page=2

THE most striking aspect of the Macquarie Bank result for the year to March is the discrepancy between the bank's growth rate in Australia and its growth elsewhere. Whatever reservations local investors might have about the sustainability of its business model, they don't seem to be shared by investors in its activities overseas.

In Australia, where Macquarie is so ubiquitous and visible that there are some signs of investor and community resentment, the bank's income grew by 15 per cent. Growth in income from international activities, however, was 59 per cent and international activities are now generating just under half the bank's income.

With 44 per cent of its staff now located outside Australia and its specialist funds increasingly investing overseas — 72 per cent of the property assets and 73 per cent of the infrastructure assets in its specialist trusts are outside Australia — the internationalisation of the bank is occurring at breakneck pace.

The announcement that Macquarie is "contemplating" a capital raising suggests another big overseas deal is about to occur. If the raising were driven by routine funding requirements, that fact would also have been announced yesterday. The fact that it wasn't suggests that it is tied to a specific deal, with intense speculation in Britain that the bank is about to become a major player in the recapitalisation of the troubled Eurotunnel between Britain and France.

Whether that deal eventuates or not, the sheer growth the Macquarie Model generates is starting to put some strain on its balance sheet, with total assets rising 56 per cent in the year and risk-weighted assets 45 per cent.

As chief executive Allan Moss said yesterday, the growth in risk-weighted assets is outstripping the bank's ability to generate tier-one capital and has returned the bank to the levels of capital adequacy it had before its last capital raising. In 2001 Macquarie raised $500 million just before the first bout of concern about its model resulted in a steep fall in its share price and forced it into desperate measures to shore-up support for its specialist funds.

Unless its growth slows, and the bank seems extremely confident that it won't, the evolution of the model will necessitate the raising of external capital.

The proliferation of specialist funds and the desire of the

co-investors in its funds to see the bank's own money committed to deals would by itself tie up considerable capital that has to be deducted from its tier-one capital base. It has $3.2 billion of equity investments. Macquarie also has nearly $2 billion of seed assets on its balance sheet, although it hopes to offload about $1.4 billion of them this year.

The model's insatiable appetite for growth, however, means that even as Macquarie recycles assets and capital it will be reinvesting them in new ventures. Its ability to churn its capital to generate high returns is starting to be affected by the success of the model.

The bank's base is not just internationalising but is broadening as the model starts to mature. As was well flagged by the bank, the dearth of performance fees from its listed satellite funds did affect second-half earnings but it was still able to generate healthy and high-quality underlying earnings growth.

With assets under management up 45 per cent to $140.3 billion and its base fee income — its annuity income — up 46 per cent to $568 million (compared with performance fee income of less than $200 million) Macquarie has built resilience into its financials. A year earlier its base fees weren't that much greater than its performance fees.

While its ability to enlarge the specialist funds business in Australia at historical rates might be questionable, the maturity of the property and infrastructure sectors in this market, and the emergence of competitors with similar business models, means the opportunities overseas ought to be more attractive in any event.

Its success offshore is self-reinforcing. The more deals it does overseas, and the more people it has offshore, the greater its visibility, the bigger the pool of co-investors and the better the access it has to deal flows and capital.

The bank doesn't seem all that concerned about external volatility; Moss says it expects good growth across all regions and group activities. With the underpinning of its annuity income flows, several deals struck after the balance date already in the bank or the pipeline, and the latent profits that will be crystallised as the stock of seed assets is run down, any deterioration in markets might undermine its momentum but will not of itself represent a threat to its stability.

The obvious popular talking point in the result will be the extent to which the bank's executives have rewarded themselves. Macquarie clearly recognises the sensitivity of the issue and devoted pages to explaining and justifying its remuneration policies. It included peer group comparisons to try to show that the bank's incentives aren't out of line with other international investment banks.

There isn't any way to make an argument that would make remuneration of more than $20 million a year palatable to the community, even though most of the huge incomes given to senior executives represent performance, rather than base, remuneration.

However it may be apportioned in the bank, it has to be said that the practice of paying about half the bank's net income to staff works — the bank's long-term return on equity is superior to any of its international peers and its total shareholder returns are equally impressive.