Nicholas Moore says it’s one of the downsides of moving into the chief executive’s chair at Macquarie Group: stepping back from the excitement of doing deals.
“There is always a slight feeling of missing being at the coal face, but at the same time you enjoy managing,” Moore told AFR Weekend after announcing his retirement on Thursday morning.
But his successor, Shemara Wikramanayake, says she’s ready for that challenge, having run bigger and bigger teams during her three-decade career at the financial services giant. She currently manages a team of 1600 in her role as head of Macquarie’s asset management division.
“It will be another gradual step in a journey I’ve been taking for 30 years,” she says.
“You give away a little, and a little more.”
But managing that leadership challenge is a minor problem compared to the big test facing Wikramanayake: how do you grow a business that is delivering record profits and whose shares sit close to record highs?
There is clearly no need to rush to boost performance.
At Macquarie’s annual general meeting on Thursday, Moore provided an overwhelmingly positive assessment of the group’s operating income for the three months ended June 30, saying it was higher than the same period last year.
That was buoyed by fees in the asset management unit, growth in mortgages and business banking, and strong trading conditions across markets, including commodities and fixed income.
Still, Macquarie left its financial year 2019 guidance unchanged noting it continues to expect results for the 12 months ended March 31, 2019 will be “broadly in line” with last year’s record annual profit of $2.56 billion.
Focus on strengths first
Looking further ahead, Wikramanayake would seem likely to focus on her strength, which is of course Macquarie’s strength: the $534.1 billion asset management arm that houses the Macquarie Infrastructure and Real Assets division’s stable of largely unlisted infrastructure funds, which acquire and divest assets to earn lucrative base and performance fees. This division generates about a third of the group’s earnings.
In the medium term, fund managers will want Wikramanayake to take accountability for ensuring Macquarie Asset Management’s big bets in renewable energy pay off. They include spearheading a consortium that last year acquired the UK government’s Green Investment Bank.
Matt Haupt, portfolio manager at listed investment company WAM Leaders, which has owned Macquarie for about 18 months, says the strong growth of the infrastructure business in recent years should keep the good times rolling for investors in the next few years.
Mooted divestments in Australia include stakes in Quadrant Energy, technology company Nuix and a holding in online property settlement group PEXA, while overseas Macquarie is reportedly looking to sell a minority stake in Brussels Airport.
“Over the next few years, when they realise all these assets, Macquarie will be spitting out a lot of capital if they choose to. That’s probably yet to play out but it’s another attraction for us,” Haupt says.
Asia an opportunity
Macquarie’s limited success in Asia given its dominant presence in Australia will also be on any wish-list investors seek to impart on Wikramanayake.
Asia accounts for just 11 per cent of Macquarie’s earnings in the year ended March 31, compared to 33 per cent for Australia, Europe the Middle East and Africa at 29 per cent and the Americas at 27 per cent.
But asked whether she would aim to boost Macquarie’s group in Asia, Wikramanayake is in lock-step with her outgoing boss.
Moore has long been careful to say that Macquarie’s growth is never driven by arbitrary goals to grow in one region or another, or in one business or another. Wikramanayake insists that model will continue.
“This is not a top down business where the CEO will say, I want a flag on a map,” she says.
Instead, she says in Asia she’ll rely on the staff across the region, who have the expertise and relationships.
“They are going to lead us where the adjacent steps for us are.”
Risk in rates
Rising interest rates and asset prices in many parts of the world could make life more difficult for the asset management business. But it’s a thematic Wikramanayake has navigated before and she refuses to spend much time worrying about these big shifts.
“There are always things changing in the macro environment and the geopolitical environment,” she says.
“Calling timing exactly is difficult, so what we try to do is position ourselves for worst-case outcomes, but keep capitalising on opportunities.”
The impact of market turmoil caused by rising rates would also likely be more muted than the in past. Unlike how the GFC put Macquarie under severe pressure, Moore’s Macquarie, with its reliance on annuity-style earnings, has been designed to ride out cycles and the timing of market events.
With refreshing honesty, Wikramanayake admits she needs to more fully understand other parts of her empire that she has not worked as closely with; the commodities and global markets business a good example.
“I need to understand from all of them the nuances, the drivers and where the opportunities are.”
One example of this may be the securities business, which has been among the laggards of Macquarie’s stable in the past five years.
But Moore already instigated changes in the institutional equities arm when in 2016 he merged the Macquarie securities division with the commodities and fixed income arm to form commodities and global markets.
Sources suggested Moore and his inner circle had reviewed the institutional equities business – including a possible sale – ahead of reaching the decision to retain it.
Addressing a flattening performance in Macquarie’s corporate asset finance unit will also occupy some part of Wikramanayake’s strategic blueprint when she takes the helm in late November. The size of the principal finance book is declining, according to slides presented at Thursday’s annual general meeting.
Several analysts upgraded their Macquarie earnings estimates in notes to clients on Friday following the succession announcement and the company’s strong first-quarter trading update.
Among those, Credit Suisse raised its reported profit estimates by 2 per cent to 3 per cent across Macquarie’s 2019 to 2021 years, while Citigroup racheted up its earnings-per-share 2019 estimate by 1 per cent and the following years by 8 per cent and 15 per cent respectively.
UBS analysts said they remained comfortable with their forecasts for 9 per cent growth in Macquarie’s net profit for 2019.
One of Wikramanayake’s first tasks will be to secure the executive team after she anoints her own successor for the asset management arm. Any significant changes to the line up or high profile exits will be closely watched, but they won’t come for some time given the four-month CEO transition period.
Platypus Asset Management’s head of qualitative investments Prasad Patkar is bullish on Macquarie and said the board was “spoilt for choice” in the succession decision due to the calibre of Macquarie’s executive team.
“I have little doubt she’ll be successful,” he said of Wikramanayake’s CEO appointment. “There is nothing broken to fix but in terms of management changes they will happen in due course … a lot of the people who are at the top [of Macquarie] are former operational executives.”