Memorandum submitted by the Macquarie
1. Within the context of this Treasury Committee
inquiry and the broader debate on the role and impact of private
equity funds in the UK, Macquarie seeks to present the merits
of what we believe is a unique form of private equity that brings
a number of potential benefitsthat is long-term infrastructure
2. One of the challenges of the current
debate around private equity lies in demystifying the term to
establish an understanding of what private equity is and does.
In the broadest sense private equity is defined as money invested
in companies that are not public ie not quoted on the stock market.
Within that broader definition, the focus has been on investment
funds used to buy a company out of public ownership or out of
a larger entity.
Such funds are therefore commonly referred to as buy-out funds.
Within that subset, the common perception of private equity relates
to funds characterised by a short investment timeframe and a need
to generate comparatively high returns over that period, which
can lead to aggressive cost-cutting practices and a focus on short-term
profitability at the expense of long-term growth and investment.
3. In reality, however, there are a range
of investment "models" that can be classed as private
equity, many of which share none or only few of the characteristics
typically associated with the term. Macquarie's aim in putting
forward this submission is to present the merits of one such modellong-term
infrastructure fundsand to demonstrate the potential benefits
this form of investment fund can deliver not only for investors
but for investee companies and the broader community.
4. Long-term infrastructure funds are typically
Long-term commitmenta long-term
investment horizon of typically more than 10 years
Partnering with managementas
opposed to replacing existing management as per the "management-buy-in"
Investing for capital growtha
desire to maintain or grow exposure to a successful investment
via capital expenditure.
Profitability with responsibilitythe
interests of a long-term investor are not served by disregarding
the needs of other stakeholders, including employees and their
trades unions, users/customers, regulators and local communities.
5. In addition to the benefits this approach
can deliver for the stakeholders of individual investee companiesincluding
investors, employees and customersMacquarie believes long-term
infrastructure funds will also play an increasingly important
role in helping to bridge the gap between the growing need for
investment in essential infrastructure services and facilities
and the ability of governments around the world to fund such investment.
6. With reference to the Committee's invitation
to provide evidence to the inquiry, this submission deals primarily
with the area of economic context, while also touching on regulation
and transparency. However we feel it is important to also articulate
Macquarie's long-term infrastructure fund model, so that our comments
on these areas are understood in the appropriate context.
7. The Macquarie Bank Group is a diversified
international provider of specialist investment, advisory and
financial services, with over 10,000 employees in 25 countries.
The Group has total assets of £44.8 billion with a further
£61 billion in assets under management. Macquarie Bank is
listed on the Australian Stock Exchange.
8. The Group has been actively involved
in the UK and Europe since the late 1980s. Today Macquarie has
over 900 employees in Europe, regionally headquartered in London
and with offices in Dublin, Frankfurt, Geneva, Milan, Munich,
Paris, Rome, Vienna and Zurich.
9. Macquarie's approach is to focus on select
sectors where our particular skills and expertise deliver real
advantages for clients and investors. This has enabled Macquarie
to developed highly specialised skills, establishing itself as
a market leader in a range of business sectors internationally.
Macquarie's infrastructure funds management business is one such
10. The Macquarie Group's European activities
Infrastructure and specialised funds
Corporate finance and advisory services.
Lending and asset financing.
Institutional stockbroking and research.
Treasury and commodities activities.
Equity structured finance and derivatives.
Real estate structured finance.
11. Further information about Macquarie
is included in Appendix 1.
The economic contextbridging the infrastructure
12. Long-term infrastructure funds have
the potential to play a meaningful role in addressing the widening
gap between the demand for better infrastructure and the ability
of communities to pay for it.
13. Traditionally, governments have facilitated
investment in infrastructure assets either by directly financing
and building roads, railways, electricity grids and telephone
lines, or by subsidising others to do so. The need for ongoing
investment remains a pressing concern for governments globally.
14. A major OECD Futures Project Report
to be released in May 2007 provides the following estimates for
global infrastructure costs:
Electricity demand is predicted to
double by 2030 and the OECD estimates the cumulative investment
required at $10 trillion.
Surface transport needs will be more
modest$50 billion a year for new railways; perhaps $200
to $300 billion annually on roads, which is about twice the present
The need for investment in water
supply estimated at $1 trillion a year by 2025.
15. But while demand continues to rise,
governments are spending less due to political pressures to reduce
taxes and balance budgets. In OECD countries, infrastructure spending
as a share of government outlays has fallen from 9.5% in 1990
to approximately 7% in 2005.
16. However while public investment shrinks
and the infrastructure gap grows, private investors are increasingly
keen to transform this once staid sector into a vibrant new asset
17. Macquarie played an active role as a
private sector partner alongside the eleven countries on the OECD
Project Steering Group. Copies of the report "Infrastructure
to 2030" are enclosed for distribution to members. The full
report can be made available on request.
BackgroundDevelopment of infrastructure
18. While infrastructure funds have gained
prominence of late, it's only in the last two to three years that
the sector has gained recognition as an alternative investment
class in its own right.
19. Macquarie is widely recognised as a
pioneer in the development of infrastructure investment globally.
The development of the sector, and Macquarie's role at the forefront,
resulted largely from an accident of historythe fortuitous
timing of unrelated events. In the early 1990s, the Australian
Government gave a major boost to retirement savings by introducing
a compulsory pension contributions scheme. The subsequent growth
in pension fund assets coincided with both a significant push
from government towards private sector funding of existing and
new infrastructure and a global downturn in equity market returns
that resulted in a search for new, alternative investment opportunities.
20. As early as 1990, Macquarie recognised
the appeal of infrastructure as an investment class, offering
a unique combination of attractive, long-term investment characteristics.
A key attraction of well-managed infrastructure assets is their
ability to generate stable yields that are sustainable over the
long-termthe result of their essential and long-term nature,
combined with strong competitive position. This in turn appeals
to investors with a long-term time horizon, in particular pension
21. As a result, for more than 15 years
Macquarie has focused on infrastructure funds management, investing
in and actively managing quality infrastructure assets on behalf
of investors, via a range of specialist listed and unlisted funds.
Macquarie's approach has been to establish long-term investment
funds which aim to identify, acquire and actively manage quality
infrastructure assets over the long term.
Defining infrastructureessential drivers
of an economy
22. Infrastructure assets including roads,
water utilities, railways, airports, ports, electricity and gas
transmission and distribution networks, provide the foundation
of basic services on which the growth and development of a community
depend. Reliable transport corridors, communication networks and
energy distribution systems are as essential to the health of
an economy as robust legal and political systems.
23. Broadly, infrastructure assets fit into
three categories. The first, economic infrastructure, includes
those assets which provide services that are used in production
processes and final consumption in the economy. Such assets are
required for economic growth and involve high initial cost outlay.
They usually have a long operational life and show monopolistic
characteristics. Typical assets would be transport, telecommunications
and utilities such as electricity, gas and water.
24. The second category is social infrastructure,
which includes the system of networks and facilities that support
people and the community. These assets are often operated within
the private sector and are used to support and provide public
services such as hospitals, education, housing, recreation and
leisure. The public/private mix will vary in different countries
and private sector participation needs to be responsive to the
objectives and approach of individual situations.
25. Finally, a recent offshoot of the asset
class is commercial infrastructure, which comprises assets for
which the benefits of sharing infrastructure outweigh the competitive
advantage of owning and operating one's own infrastructure. Characterised
by a high degree of competition, this category includes assets
such as satellites, cable networks, and mobile phone towers.
26. However in determining attractiveness
from an investment perspective, Macquarie focuses on key characteristics
rather than types of infrastructure. Certain features of particular
infrastructure and related assets provide stable, long-term revenue
streams that are a good match for the long-dated liabilities of
pension funds and other investors. For example, from an investment
perspective, regulated infrastructure assets are attractive because
they provide essential services to the community in which they
operate, they tend to enjoy robust and stable demand and their
revenue and charges are regulated. On the other hand, certain
electricity and gas generation and production assets compete for
sales and are exposed to market risks, making them far less attractive
for our investors.
Long-term infrastructure fundsthe Macquarie
27. Over the past 15 years Macquarie has
developed and refined an infrastructure investment model that
we believe is unique, and that is well-suited to the important
nature of infrastructure businesses. Today, Macquarie manages
£22.7 billion in equity across a global portfolio of over
100 infrastructure and essential-service investments including
water, electricity & gas transmission, renewable energy, toll
roads, airports, broadcast towers and social infrastructure. Approximately
60% of this portfolio is in Europe. Of the total amount, £7.8
billion is invested via unlisted, or private equity funds.
28. In creating and managing long-term infrastructure
funds, Macquarie's approach is based on the following core characteristics:
29. Macquarie's investment model is based
on a long-term investment horizon. This is core to our investment
philosophy, and reflects the fact that investors in our funds,
primarily pension funds, insurance companies and other large institutions,
are seeking stable and predictable returns over a similarly long-term
time horizon. From an investment management perspective, this
has a fundamental impact on our approachwhen we invest
in an asset we look at its business prospects over the next 30
years. One of the most significant differences between Macquarie's
infrastructure investments and a traditional private equity approach
is that our business plans do not assume that we will sell the
businesses we buy, whereas the typical private equity approach
depends upon the ability to resell an asset within a period of
three to five years.
30. For example, when Macquarie funds in
2004 acquired 70% of Brussels Airport from the Belgian Government,
which retained a 30% stake, we made a commitment not to sell our
shares for a minimum period of 10 years. When two Macquarie funds
recently acquired Airwave, the UK public safety communications
service, we also committed to retain our investment for a minimum
of 10 years and declared our intention is to remain for the longer
Partnering with management
31. Unlike the "management buy-in"
approach typical of many private equity funds, Macquarie is attracted
to companies with a strong, established management team. We seek
Board-level positions where we can provide strategic input and
direction, in order to complement the skills of existing management
teams, working with them to provide support and enhance overall
performance. Consistent with our long-term focus, Macquarie's
model places a high priority on recruiting, retaining and rewarding
Investing capital for growth
32. Long-term infrastructure funds are willing
to commit to significant capital expenditure programmes. Our investors
generally want to maintain or grow their exposure to a successful
investment, and further capital expenditure enables them to do
33. The Macquarie-managed funds that are
lead investors in Thames Water have agreed to an investment programme
of £2.5 billion over the next three years.
34. On a smaller scale, following Macquarie's
acquisition of the UK's renewable energy provider Energy Power
Resources Limited (EPRL) in March 2005, over £3 million was
invested at Eye power station to ensure that it was Waste Incineration
Directive (WID) compliant from December 2005. Since then another
£4 million has been invested at Thetford power station. EPRL's
budget assumes further capital expenditure of £5 million
Profitability with responsibility
35. For a long-term investor, it is essential
that businesses are managed in a way that is both profitable and
responsible. Macquarie appreciates the need to satisfy a range
of stakeholder groupsemployees and their trade unions,
users/customers, policymakers, regulators, local communitiesbecause
these groups will impact the long-term viability and prosperity
of the business. As a long-term investor, it is not in our interests
to ignore or seek to compromise the interests of these stakeholders.
36. Macquarie has extensive experience in
balancing the needs and priorities of different stakeholder groups,
the need to facilitate efficient
linkages within broader infrastructure systems;
the need to work with employees and
their trades unions, local councils, business and community groups
to achieve well-informed, consensual solutions;
the need to provide users with value
the need to deliver on performance
objectives for investors;
the need to minimise social and environmental
impact on surrounding communities;
the need to maintain the overarching
priority of safety and security.
37. For example in the case of our proposed
investment in NRE, a gas and electricity distributor in the Netherlands,
we have committed to put the public interest before our commercial
objectives. If our municipal co-shareholders judge that our business
plans are counter to the public interest, then our plans must
38. When Macquarie acquired the East London
Bus Group (formerly Stagecoach London) from the Stagecoach Group,
£60 million was injected into the staff pension plan scheme
(which includes a final salary component) as part of the transaction
to bridge an existing funding gap and safeguard employees' future
Regulation and transparency
39. Due to the nature of infrastructure
assets, many of the companies in which Macquarie-managed funds
invest are regulated entities in their own right. Examples of
such companies include Wales & West Utilities, Thames Water,
Arqiva and National Grid Wireless. In these examples, the regulatory
framework provides a range of controls and assurances in relation
to pricing, service levels and investment. In addition, regulated
entities are required to make public reports to the regulator,
ensuring an appropriate level of transparency and public accountability.
Other assets such as Bristol and Birmingham airports are not subject
to formal price controls however their activities are subject
to specific sector regulation to ensure that their behaviour is
in line with the public interest.
40. Other infrastructure businesses operate
under long-term concession agreements or customer contracts, often
issued by government or public agencies, with relevant service
standards, pricing mechanisms and other controls built into the
concession agreement. Examples within Macquarie's portfolio include
East London Bus Group, Moto, M6 Toll and Airwave.
41. In relation to transparency, many Macquarie-managed
infrastructure funds are publicly quoted companies and, as such,
provide detailed financial and other reporting on a regular basis,
including information about investee companies.
42. For example:
Midland Expressway Limited, the company
which operates the M6 Toll, is owned by Macquarie Infrastructure
Group (MIG), which is listed on the Australian Stock Exchange
Bristol and Birmingham Airports are
both partly-owned by Macquarie Airports (MAp), which is also ASX-listed.
Airwave, Arqiva and National Grid
Wireless are all partly-owned by Macquarie Communications Infrastructure
Group (MCG), also listed on the ASX.
Red Bee Media is controlled by ASX-listed
Macquarie Capital Alliance Group (MCAG).
43. One of the key attractions of investing
in infrastructure assets is their ability to generate predictable,
stable cashflows over an extended time horizon. As a result they
are able to support a level of debt that may be greater than for
other types of businesses where there is higher volatility of
earnings and dividends. Macquarie's approach is to structure a
debt package that is appropriate to the nature of the business
and to our long-term investment horizon and as a result the level
of leverage in different businesses can vary substantially. Each
proposed debt structure is rigorously stress-tested against a
range of worse-case scenarios to ensure robustness. This analysis
is further tested and ultimately endorsed by the range of banks
that participate in the debt funding for each asset. Consequently
debt is typically investment grade.
44. Where appropriate, the capital structures
used by Macquarie provide further funding to meet the investment
and expansion plans of the Company, as well as accommodating liquidity
needs. Protection against adverse changes in the cost of borrowing
is readily available via a liquid interest rate swaps market.
In addition, Macquarie applies hedging to the majority of debt
carried by our assets/funds for further protection.
45. Broadly defined, private equity funds
are now a significant component of the UK economic and financial
landscape. Within the broad definition of private equity funds
there is a wide range of investment models and approaches. Long-term
infrastructure funds, a model largely pioneered by Macquarie,
is one such approach which we believe offers substantial benefits
not only for direct stakeholders but in contributing to the broader
need for ongoing investment in important community infrastructure
74 Inside the dark box: shedding light on private
equity, The Work Foundation, March 2007. Back
Infrastructure to 2030: Main Findings and Policy Recommendations,
OECD Futures Project on Global Infrastructure Needs: Prospects
and Implications for Public and Private Actors, May 2007 Back