Macquarie Group has surplus capital on the balance sheet and continues to seek businesses which meet its acquisition criteria, as chief executive Nicholas Moore highlighted at the annual general meeting of Australia’s only listed investment bank in July.
In the wake of the financial crisis, the group made successful acquisitions in funds management but – with its sharp eye on shareholder value and the risk-return equation – finds quality assets are in short supply.
Volatile times may have impacted on the homegrown financial giant, which now operates in 28 countries, but as Moore explains in an interview with [email protected] School of Business, Macquarie’s risk management framework has served it well through a range of market cycles.
An edited transcript of the interview follows.
[email protected] School of Business: Nicholas, let’s look at your overarching approach, how do you manage risk within Macquarie Group?
Nicholas Moore: Risk is the essential element that we need to manage within Macquarie. The risk-return equation is something we have to look at with every business decision we make. Every dollar we put out the door – that is, every person we hire, every new system that we bring on, every new product we develop to sell to the marketplace – has a built-in risk.
Our job obviously is to work out what that risk is and price it. Self-evidently, you get a return for pricing risk appropriately, so if you get that wrong – one way or the other – the business will not be successful. Macquarie has had a long history in terms of pricing risk and we think we’re quite good at it in a range of ways and in a range of different marketplaces.
We’ve developed a whole way of looking at risk and how we see the world. For us, the key point upfront is that taking a risk is essential, so what’s the return? It’s about getting that matching right. On that path today you can take no risk if you just buy government securities – that’s assuming it’s an Australian government, which delivers very high credit but obviously very, very low return, and certainly below our cost of capital. We need to step up the risk to provide our shareholders with an appropriate return on the capital they have invested.
So the first point we consider is how much we can afford to lose. And we size every transaction accordingly. (That’s looking beyond a situation where we just won’t take the risk under any circumstances – there’s a whole range of risks we won’t take because we see them as being too bad.) But if it’s something that we are happy to consider, we say: “Okay, how much can we lose?” And we look at how much … exposure we’ll take to the particular transaction or market, depending on the product.
The second thing we consider is the return. “If we can lose this much; what’s the return we’re getting?” If the risk is too small, you’ll probably find you’re not making anything on the outside so there has to be that trade-off. Pricing that trade-off right is what determines the underlying profitability. So that’s the way we look at it.