Equity & the Big Buck

Cross-posted at Larvatus Prodeo
Modern capitalism is a very strange beast. Globalisation has seen the dizzy rise of international commodities moving across borders, both physically and virtually through futures trading; devolution of controls on wages & conditions; attempts at standardised regulation & reportage of performance. And the curiousness of capital's counter-move to maximise profit by the increasing use of private equity to evade financial market scrutiny, governmental regulation & the pesky need for dividend payments.

The facilitators, the midwives of profit, are the merchant bankers. An international arena where Australian versions have been minnows. Until now. Praise ye all the rise of Macquarie Bank. From an income of $757 million in 1998 to $7.2 billion this year, Macquarie has moved from the conservative model of its parent Hill Samuel, to the Harvey Wallbanger caricature of comic greed, growth for growth's sake. Its assets buying division, led by Nicholas Moore, has been largely responsible for the bank's spectacular growth & its emergence into the international monetary market through an assets buying spree including airports, tollways & utility suppliers such as London Water.

And yet. And yet. To take the next big leap into major player league, Macquarie must be able to access the big bucks in the US private equity market. As it attempted to court through the APA buyout of Qantas. Disastrously. I don't doubt there's a degree of closed shop about the American response to Macquarie, but there has also been reasoned disquiet about how poorly the bid seemed to have been managed. Disquiet too over the failed Alinta buyout. A majority of Macquarie's profits comes from its fees in facilitating these transactions - the returns from its ownership of assets are rather underwhelming. And likely to slide south. Owning airports might be a stealing candy from babies routine at present, but no one but the most stupid can do anything other than look at the long term fundamentals & shake their head in bewilderment. We have either just experienced peak oil or shall within the next three years. Flying aircraft profitably becomes extremely difficult with high fuel prices, & no one is even vaguely close to developing an alternative fuel to aviation fuels with the necessary kilo joule output to propel hordes of humans in loud shirts on their quests to visit other countries' MacDonalds.

Let alone the fact that emerging carriers from Asia in particular can run operations at a fraction of the costs of OECD based carriers - competition yes, & we can now look forward to flying into Kuala Lumpur for about $300 return as of September. But not via a Macquarie-owned facility. There's a new hand being dealt at the landing fees negotiating table, and frankly Macquarie is going to have respond.

So the fundamentals of their asset portfolios, particularly hydrocarbon fuel transport infrastructure is a wee bit shaky, and they have just spectacularly stuffed up a major corporate takeover, involving the very people they need to impress and win over most in order to expand. And therefore secure their future profits. But you wouldn't think there was a doubt in the world as far as the market response is concerned. A year ago, Macquarie had quite a bit of trouble raising $700 million in the face of suspicions at the fundamentals by institutional shareholders. Not now. Thursday saw $750 million in fundraising, with 8.62 million new shares, selling for $87, trading for $92.90 after trading suspension was lifted. Smiles all round as $100 is being confidently predicted per share & the $2 billion profit line looms.

Of course the market is all about perception. Smoke & mirrors. And just as easily disrupted. If the murmurings in the States about Macquarie are even vaguely true, then this latest piece of herd stampeding by the market has all the hallmarks of greed, arrogance and stupidity. And the $750 million just raised didn't come from Eddie Macguire's termination payment - it came from your super funds.

Or more worryingly, it may start to come from the ones that David Murray is in charge of. The Future Fund. Murray rushed to condemn the suggestion of political interference in the management of the fund at the ALP policy to spend some of the profits at upgrading broadband delivery. A continuing shambles that should have had Coonin's head on a platter months ago & the Telstra board members put out to pasture. At an Australian Institute of Company Directors lunch in Sydney on Wednesday, Murray reiterated the Funds investment model which will begin operations on June 30th. "The trustees of the funds are the guardians of the future against the claims of the present. Board independence is absolutely crucial." Rudd's broadband plan was again argued against, saying that use of earnings for special projects would have "consequences on the portfolio...consequences on the cash flows."

BUT he refused to rule out the Fund's involvement in major private equity deals, arguing that "our main focus would be on value to the fund." After having rejected suggestions that the monies flowing into the Future Fund was money not going into infrastructure projects, insisting that the monies received were from the surplus after Budget allocations had been made.

Surpluses generated by a resources boom, part of a cycle, not a goose & its golden eggs, and cycles have a habit of doing just that - cycling - up and down. And the failure of his political masters to adequately address infrastructure needs in everything from power generation, water provision & transport infrastructure able to allow Quarry Australia to ship vast chunks of this wide brown land into the furnaces of Asia, is a basic failure to provide the sort of fundamentals necessary to ensure the economic growth and response to a world which must address climate change if the wealth that is deemed necessary is going to continue to be generated. But putting monies into private equity deals with all of the problems of regulation, control and the high risk is OK. According to David Murray. Who, by the way is also now in charge of the $5 billion University Fund that the vice chancellors applauded like so many performing seals post budget.

Lovely buildings, I'm sure but hardly the stuff to improve a very mediocre tertiary section in terms of teaching performance. & its not as John Howard would have it, because the nasty Marxists still run Humanities in this country. Its because students have to sit in tutorials of 100, or lecture theatres which cannot accommodate the Cooks Tour Version of education, & sit in neighbouring rooms watching their lecturers on VDUs. But they can look forward to gleaming towers of VC pomposity across campuses. At least it ensures that the David Murrays & Alan Moss's of the world can deliver rousing keynote addresses to the worth of Mammon in the style to which they have grown accustomed.

And it would seem that the grasp and greed that drives the market is now our national credo. I suspect we shall receive exactly what we deserve in return.