Receive free Non-Fiction updates
We’ll send you a myFT Daily Digest email rounding up the latest Non-Fiction news every morning.
For 150 years, Hill Samuel was a venerable name in British merchant banking — known, among other things, for the creation of oil company Shell. By 1995 it was practically defunct, subsumed inside Lloyds Bank and beaten out of its core business lines by the big US groups that dominate global finance today. The same fate befell dozens of other banks, with those that tried the hardest to compete on Wall Street — Deutsche Bank, Nomura and Credit Suisse — suffering the most.
It is therefore more than a curiosity, but rather a vital management case study, to find one small merchant bank of the era that emerged from a peripheral market and grew into a global behemoth with a large, highly profitable operation in the US.
That merchant bank is Hill Samuel Australia, better known by the name it took after becoming independent in 1985: Macquarie. The company is familiar to financial insiders, and now the British public is getting to know it as a big player in troubled infrastructure businesses.
According to longtime journalistic followers of the company Joyce Moullakis and Chris Wright, the name change was intended to reflect an aspiration to do pioneering work, along with a healthy dose of prudence. Inspiration was found in Lachlan Macquarie, the fifth governor of New South Wales, who established the colony’s first currency and retired to Scotland with a reforming reputation.
Moullakis and Wright’s book The Millionaires’ Factory, told in anecdotal style and based on a healthy level of access to older generations of Macquarie bankers, charts its rise from a handful of Harvard Business School graduates working on advisory mandates in Sydney to become the pioneer of infrastructure as a separate asset class for long-term investors, and today, one of the world’s biggest financial traders in commodities.
So why did Macquarie prosper when many others did not? The authors show Macquarie’s culture was far more important than any particular business deal, strategy or innovation, with several of its peculiarities going back to the bank’s early days. The philosophy of David Clarke and Mark Johnson, who built Hill Samuel Australia in the 1970s, “was to give employees as much latitude as possible, while remaining consistent with safety and controls”.
Throughout Macquarie’s history there has been little top-down strategy or capital allocation. Instead, the company empowers entrepreneurial individuals to evolve new business lines, from 24-hour foreign exchange dealing in Sydney, to gold bullion arbitrage with London, cash management trusts, cross-border leasing and later ideas in infrastructure and commodities.
Macquarie loved to explore “adjacencies”. If it was doing well in gold bullion, it could push into other metals. Once it had pioneered infrastructure finance in Australia, it could take the same model abroad, making small bets, each with the potential to grow into a large business. Those that failed, Macquarie quickly shut down; those that succeeded got capital to grow, and the individuals behind them became exceedingly wealthy. Central management was there to support and monitor, while enforcing strict risk controls — another early part of the culture — to make sure nobody blew up the bank.
Described like this, Macquarie does not sound so magical, but it is a rare management that truly backs its staff. Macquarie’s approach also differs notably from the strategies that European banks deployed on Wall Street: no transformational acquisitions, no mass hirings of mercenaries from larger companies, no attempts to buy market share by deploying a large balance sheet, and no promises to offer a full range of services — all approaches that led to bloated cost structures and unwise risk-taking.
Infrastructure is Macquarie’s most famous business line, although it makes up a small part of the bank’s revenues today. The authors explain how it began with an advisory role on a public-private partnership for Sydney’s M2 motorway, during the course of which Macquarie realised, first, that the long-term cash flows from a toll road are ideal for an investor such as a pension fund; second, that the equity in such a project could have value, not just the debt; and third, that the real money was to be made from acting as a developer, not a mere financier.
From that evolved the infamous infrastructure finance model, where the cash flows from such projects get structured and tranched, sold and resold, packaged and refinanced, sometimes to the detriment of users. As owner of the UK’s Thames Water from 2006 until 2017, Macquarie oversaw a large increase in debt while earning double-digit annual returns on investment, but after the recent rise in interest rates the utility is close to collapse. Moullakis and Wright explain clearly how much infrastructure activity is driven by tax and how it lets Macquarie harvest fees at every turn.
Inevitably, a fair chunk of The Millionaires’ Factory recounts past controversies, and those passages drag a little. The book is also short on the kind of banker debauchery that would give it wider appeal: the authors discuss a lot of Macquarie executives and only some of them come to life on the page. Nonetheless, for readers who want to understand a fascinating financial institution and how it succeeds when so many rivals falter, The Millionaires’ Factory comes recommended.
The Millionaires’ Factory: The Inside Story of How Macquarie Bank Became a Global Giant by Joyce Moullakis and Chris Wright, Allen & Unwin £29.99, 432 pages
Robin Harding is the FT’s Asia editor
Join our online book group on Facebook at FT Books Café
Read the full article here
