Macquarie Group, Ltd. (OTCPK:MCQEF) Operational Briefing Broker Conference Call February 5, 2018 6:00 PM ET
Sam Dobson - Head of Investor Relations
Nicholas Moore - Chief Executive Officer and Managing Director
Shemara Wikramanayake - Head of Macquarie Asset Management
Ben Brazil - Co-Head of Corporate and Asset Finance
Andrew Downe - Head of Commodities and Global Markets
Tim Bishop - Head of Macquarie Capital
Gary Banks - Independent Voting Director
Nicole Sorbara - Chief Operating Officer
Greg Ward - Deputy Managing Director and Head of Banking and Financial Services
Garry Farrell - Co-Head of Corporate and Asset Finance
Jon Mott - UBS
Brian Johnson - CLSA
Andrew Lyons - Goldman Sachs
Richard Wiles - Morgan Stanley
Andrew Triggs - JPMorgan
Frank Podrug - Merrill Lynch
Tony Mitchell - Ord Minnett
Craig Williams - Citi
Simon Fitzgerald - Evans & Partners
Anthony Hoo - Deutsche Bank
Good morning, everyone. Welcome to Macquarie's 2018 Operational Briefing. For those who don’t know me, I’m Sam Dobson, the Head of Investor Relations.
Before we get started, can I just ask that you either switch on the phones off or put them to silent. In the audience today, we have with us institutional investors and analysts, and teleconference participants include members of the press and webcast viewers. I welcome to you all.
The purpose of our operational briefings as you know is to hear management present on various aspects of the businesses in more detail. This year's briefing will start with an update on the overall group for the third quarter as per our usual practice and this will then be followed by three presentations on three themes that we view as important in the medium-term for Macquarie, Infrastructure, Energy, and Technology as you know.
The format of today's session will be as follows. A short video will proceed each of the thematic presentations. Nicholas will give a short introduction, which will be followed by a panel discussion with our group heads. I'll then open the floor to Q&A on the conclusion before we move on to the next thing.
In addition to today's presenters, in the front row we have some of Macquarie's senior management, who are also available for questions. On arrival this morning, you should have received the documents that we lodged with the ASX, including the presentation that we'll be going through. The aim is to finish today's briefing today by 12 o’clock as we got in the slide.
So, with formalities out of the way, I'd like to introduce the first section of today's briefing, which is a Group update since the interim results and I welcome Nicholas Moore our Chief Executive and Managing Director.
Thanks Sam, and thank you all very much for coming today. You are all very, very welcome. It’s great to see so many familiar faces. I know many of you have been following our story for many years. Now, my first slide will be familiar you all. This is a description of the Macquarie Group.
And as I always say, you can’t understand Macquarie without actually paying attention to the five-different business that we actually carry on here. Largely unchanged from when you saw it last, there has been a small change in terms of Macquarie Capital reflecting management changes that were made towards the end of last year.
Now, turning to the update for the third quarter. Overall, satisfactory trading conditions for the third quarter across the group. The annuity style businesses, this is Macquarie Asset Management, Corporate and Asset Finance, now Banking and Financial Services Businesses. Net profit contribution for the quarter was slightly up on where we were this time last year.
On a year-to-date basis, the net profit contribution from these groups is up. It’s up due to the strong performance fees we’ve talked about before in MAM. The timing of transactions in CAF, and of course the continued growth in Banking and Financial Services we’ve talked about now for a number of years.
The capital markets facing businesses for the quarter, that’s Commodities and Global Market and Macquarie Capital, their combined net profit contribution was down on where we last year, but that’s primarily as a result of income recognition associated with the transportation and storage agreements within our commodities business.
Similar story year-to-date in terms of where we stand. The result from the Commodities and Global Market Group and Macquarie Capital is down in combination in terms where we were this time last year, as a result of that accounting issue coming out of the recognition of those transportation and storage contracts.
Some highlights from the quarter, starting with our largest group Macquarie Asset Management. From overall, assets under management you can see we’re up 2% on where we were in September, largely driven by market movements. When you look at the detailed strong performance coming through again from MIRA you can see over $7 billion of new capital being raised over the period, and $4 billion of capital actually being put to work over the period.
$3.9 billion of asset divestments came back and that actually went through to our client. And at the end of the period, we had about $15 billion of capital to deploy. MIM you can see good performance in MIM. We’ve talked about that before being resulted in an award of $4.6 billion of new mandates coming through there. And we also note the continued growth in our infrastructure debt funds with the amount of commitments there at $8.2 billion. As well as that we’re announcing in Europe this evening the acquisition of a real estate management company in Germany about $10 billion of assets under management.
Turning to Corporate and Asset Finance, largely in-line with where we were in September in terms of the balances for the Asset Finance business from a principal finance viewpoint we note a number of realizations that took place during the quarter. Banking and Financial Services, similar trends to what we’ve seen in the recent past. So that includes of course the stepping up in terms of our books of business.
Business banking being up 1% as you can see. Funds under platform, up 8% largely reflecting of course good market conditions that we experienced over the quarter. The mortgage portfolio are up 4% on the quarter. Deposits were flat on the quarter. We had seen them growing in recent years, but obviously with the opportunities out there we’ve actually seen deposits remaining flat as a period. And also, we note as well and we’re talking a lot about it, the digital - the awards for our digital banking applications, which are of course excellent.
Now turning to the capital market facing businesses in terms of our Commodities and Global Markets business there you can see stronger results noted for over North American Gas and Power business. There was no volatility in the other markets, in particular Global Oil and Metals. And despite this lower volatility in foreign exchange and interest rates, we saw good client activities coming through our derivative activities, particularly in Japan and North America.
In the equities market, we saw increased turnover, which is actually flowing through of course to greater revenue to our securities business. Macquarie Capital, again similar themes to what we have seen in recent years, strong position obviously here in Australia at Number 1 position, strong position of course in Global Infrastructure, we’ll be talking about that of course a lot today.
A number of other themes in terms of that infrastructure theme coming through that you see noted here, and as well as that you will see the nature of the DCM business in the U.S. that’s going well. And the overall activity levels as we say they have strong levels of activity with 107 transactions are being completed globally for the period.
In terms of staff numbers, our staff numbers are up on where they were. You see they are up about 300 on where we were in September. Australia of course still our largest place of operation. In terms of the balance sheet, you can see a bit of growth in balance sheet taking place. A bit of change in terms of composition of the balance sheet.
So, in terms of funding with those deposits being flat, you can see the increase in funding has come through on the wholesale side. So, you can see short-term funding and long-term funding stepping up over the period. We were able to actually increase the amount of long-term funding and extend the maturity of that long-term funding over the period of up to about 4.5 years on average.
You can see the use of those funds actually go very much into the trading assets in terms of the asset side of the balance sheet. So, some growth taking place there from a balance sheet viewpoint. In terms of our regulatory ratios, we’ve always had strong capital position, strong ratios and of course no exception today. If we look at our CET1 ratio, a 10.7% under the APRA measure of 13% on a harmonized basis, well in excess of regulatory minimums. In terms of our leverage ratio, 5.8% or 6.6%, again well in excess of the 3% regulatory minimum.
Our LCR ratio of 153 versus 100 well in excess of course and the non-stable funding ratio of 109, compared with 100 being the requirement. So, very strong regulatory ratios. In terms of overall capital position, you can see what’s taken place over the quarter. We started the quarter with 6.2 of surplus capital on a harmonized basis. You can see how the P&L obviously steps up.
The profit for the quarter steps up the amount of capital lessened by of course the dividend that we paid over the quarter, as well as that we had divestments, and you recall MQA was divested during December, which steps ups the capital again, and then you can see that business growth we referred to earlier, actually using up $400 million of capital together with moments in reserved. That brings us to about $6.1 billion of harmonized surplus capital under and APRA basis of course, which were regulated by - that comes to under about $4.1 billion of surplus capital, a very comfortable capital position.
In terms of changes, in terms of capital regulation, obviously you will be aware that in December, the Basel committee finalized its reform in terms of how to calculate and get capital under Basel III. Obviously, APRA is looking at that and it said it’s going to incorporate it into it unquestionably strong requirements that it had announced last year, and actually will be telling us how it all works during the course of the year.
That actually will be applicable to us from January 2020, and of course where we sit today with a large capital position. We feel very comfortable, we will be able to accommodate any additional requirements that may arise. As we mentioned before, we’ve got all the approvals necessary for a share buyback. That said, we didn’t actually buy any shares over the quarter, but the approvals continue in place.
In terms of tax reform, obviously towards the end of last year we had tax reform in the United States. For the year ended 31 March, 2018 we don’t expect any material impact in terms of our tax expense within Macquarie. There are a few adjustments that will take place. Of course, we don't expect any material impact there. On a go forward basis, we expect our effective tax rate in the U.S. to reduce by about 25%.
In terms of the overall impact on Macquarie’s effective tax rate, we see that in the 3% to 4% based upon our historic proportion of our income has come from the U.S. So obviously, in the future the impact of that will depend upon how much U.S. income we have compared with the other sources of income we have in the group, but at the moment looking on an historic basis, it’s about 3% to 4% in terms of the change in the effective tax rate.
Turning to the short-term outlook, as usual we rebuild it up from the group viewpoint. This is a slide you have seen a very similar of course in terms of what you’ve seen before in terms of where all our groups see their short-term outlook. So, starting with banking financial services bottom left, you see the same sort of trends that we’ve been talking about over the while in terms of the growth of its books.
Corporate and Asset Finance as we mentioned before, the Asset Finance Book is largely going to be flat over the quarter as we mentioned. The income change will come from the realization that takes place in the principal book. Macquarie Asset Management base fees we say will broadly be flat. Performance fees obviously will be determined in terms of the final outcome. Very strong performance fees in the first half of this year, which we’ve said, we do not expect to see repeated in the second half of this year.
The capital markets facing businesses from Macquarie capital viewpoint, obviously we talked about the pipeline of principal transactions from a Commodities and Global Markets business, obviously we're seeing an improved result in equities flowing through, and we are also seeing lower impairments. We expect to see lower impairments flow to the book there and good customer activity coming through, notwithstanding the low volatility that we mentioned earlier.
So, bringing all those different group outlooks together, we expect to have group contribution, net profit contributions from the group to be slightly up on where they were last year. In terms of the half-on-half comparison, obviously we highlighted before the very strong performance fees we received in the first half, which we don't expect to be matched in the second half, and accordingly we expect to have second half to be brought in line with where we are in the second half of last year rather than the first half.
The effective tax rate, we think will be brought in line with the first half, which of course is lower than last year bringing that all together. We expect the group result to be up about 10%, approximately 10% on where we were last year. Now that outlook of course is subject to a range of uncertainties that we can’t control in term - including market conditions, the impact of foreign exchange, potential regulatory changes, and tax uncertainties, and of course the completion rate of transactions in the conduct of period end reviews.
From Macquarie viewpoint, of course we’ve always talked about the medium term, and this slide actually is unchanged for many years. Talking about how we see our position in the medium-term. And as we say there, we feel confident, we are well-positioned to deliver superior performance in the medium-term. And that confidence comes out of our deep expertise in major markets. And that’s what our you operational briefing today will be focused on. It will be focused on those expertise, as Sam said, in those three particular areas that we talked about before.
In terms of Infrastructure, in terms of Energy, and Technology. And it’s that strength of expertise that allows our business to develop and to evolve, as well as that expertise is allowing us to various cost initiatives, including in technology of course, most importantly supported by a very strong balance sheet, and as we mentioned it’s actually been enhanced over the period in terms of terming out of our debt and our strong capital position. And most importantly, the bottom line there, the proven risk management framework and culture that underpins everything that we at Macquarie.
So, the next slide, I think you’ve seen before, there’s no additional information. These are all based on the September results. Now, we’re available to take questions before we turn to the in-depth view of our expertise. Sam?
Okay Before I hand over to Nicholas, I’ll ask our group heads to come upon the stage and join Nicholas and Alex will go back to the front row. With that I will hand over Nicholas to walk us through the rest of the presentation. Thanks very much.
Okay, thanks Sam and this is a very good flow on from Brian's question in terms of Macquarie’s growth and where does it come from. As we mentioned before, Macquarie is very much focused on the medium-term, and people have often commented on the right-hand side of this slide. Of actually watching the business mix change in recent years, seeing the annuity sale income go from 25% of the group to 70% of the group, seeing international income step up international step up. And the question we often get asked is, where is this growth coming from? And the answer we give is largely on this page here.
So, we say this growth is coming from the people within Macquarie, a very broad group of people who actually are very well connected with their clients and very well connected with the markets. And so, they are the people who can see the opportunities and leave the group in terms of where the opportunities actually reside. So, it’s very much driven by that and of course it’s people with deep expertise. So, coming back to this slide we’ve used on many occasions it is the expertise in the people, and the outcomes that they are actually issuing from areas of this deep expertise.
Where we sit from a central viewpoint of course, we’re looking to make sure that the use of the capital actually will be profitable and will be profitable on a long-term viewpoint. So, the corporate centre obviously provides that capital, provides that reviewing element, and of course the risk management area of Macquarie is reviewing each category of investment we make, each business we make, and making sure that it satisfies that appropriate risk return equation that we talk about.
Now the next slide is one hopefully people are familiar with. This is obviously a slide that we are proud of. This is our history from 1969 showing many years of profitability. Indeed, every year we’ve been in business, we’ve been profitable, we think that is a good evidence in terms of our risk management culture, but it’s not just a question of being profitable and being careful, of course what we highlight on this slide is the new activities that we’ve actually ended into. And what we would say is, these new activities have all been very much driven of the expertise that we have within the group and the ability of people to look from the areas of deep expertise into an adjacent area.
Now the next slide is the product of our annual staff survey or biannual staff survey we do, where we actually ask our people, where do you think the opportunities are coming from? You are the source of opportunities with Macquarie, what do you say, you have probably seen these slides before. The bigger the word means the more often it’s been used in terms of the outcome. And so, you see the theme for today's operational briefing in terms of where do our people see opportunities for the future and you see three big words obviously there, Infrastructure, Energy and Technology. Very important features for Macquarie.
Now, why are our people seeing these as opportunities. Well, obviously there is the big picture story and we sort of summarized a few facts here on this page that most people will be familiar with. Obviously, the infrastructure story is a massive global story in terms of what’s taking place out there. Urbanization is taking place, we’ve got to GDP growth happening, but urbanization is taking place, a billion people are expected to move from the country into the cities over the next while.
So, the growth of cities need infrastructure, half of that we see probably taking place in Asia, but we do see very large spin taking place in the developed world and we break out there in the United States. So, obviously quite a lot of discussion in the U.S. at the moment, about the side of state of infrastructure, about $6 trillion are necessary in the U.S. between now and 2030. So, overall $45 trillion are needed to be spent. Most of that will obviously be spent by governments around the world, but there is a role for the private sector in providing that.
Secondly of course, energy as the world grows, our energy needs continuing to grow to massive section of the global economy. We expect energy consumption to be increasing by 30%, but as well as that we know in energy there has been a whole range of disruptions taking place. We’ve seen gas coming in and displacing coal and we will refer to that in the slide here in terms of what’s taking place, and more recently obviously renewables are coming in to replace both coal and gas on an ongoing basis. And the expectation of course is that this momentum will continue and to accelerate.
And finally, of course Technology, I think we all know about Technology. We all live with Technology in our pockets. It is changing our lives, it is delivering better outcomes, cheaper outcomes for us in everything we are doing. And it across our own business, we’re investing very heavily in technology, we will talk about that, but we are investing in technology so we can deliver much better outcomes for our customers across the board. As well as that of course add client, all our customers are being impacted by technology. We’re supporting the development as we will talk about before of customers who are building businesses in that space and also supporting customers who are impacted.
So, now I would like to run a video with a whole range of Macquarie people around the world who will be talking about not just of course these big themes, but they expertise and this is the keyword we are using, the expertise that Macquarie has. Because the fact that there were big trends happening in the world is interesting, but of course, what actually does matter is what is our expertise in these particular themes. So, we will hear some of our people talking about our expertise starting with the Infrastructure.
Okay. So, it was quite a few of our people around the world working in this space at Macquarie. The next slide you can see summarizes our expertise. And as you see there is a lot of Number 1 there in terms of market position. Obviously, Number 1 as you have heard on the video from Shemara in terms of Asset Management Number 1 in terms of this advisory business and also Number 1 in terms of how infrastructure product here in Australia from a research viewpoint. You can also see in on this slide the size of our teams that was mentioned on the videos as well 228 is in the advisory business, and over 500 in Martin's business focused on the management of these assets.
In terms of the history, most of you will know the history of Macquarie. In this space, obviously we have been going since the early 90s. What I find interesting on this slide is the bottom facts that have been broken out from 2012. We were obviously very strong business in 2012 and that we would claim Number 1 position in asset management and advisory, but look at our asset management portfolio back then, the equity was 43 billion today as you heard it just a little under $80 billion at 79 billion, transactions completed back then, $18 billion transaction completed last year $48 billion. So even though we had a strong market position then, we have been able to see good strong growth continuing to come through.
Now, what we would like to do and what we will see in these sessions is we will do case studies that will actually allow our group here to talk about the expertise that we actually brought to different circumstances and you can see hopefully through that why that expertise is actually driving the growth of our business. I would like to hand to Shemara, who of course is heading our Asset Management Business.
Thanks Nicholas. So, our approach in asset management is the same Macquarie wide approach that Nicholas mentioned where our business is led by the expertise of our teams on the ground. And as Nicholas said in the MIRA division that is more than 500 persons strong team specialists on the ground in 18 countries and more than three times as big as a next largest team. And a lot of leadership team have been together investing four over 20 years now. So, we thought we would start with a couple of case studies in the water sector to demonstrate how we deploy our capabilities.
And the first of those Thames Water that story started almost 20 years ago in about 2,000 when some of our utility experts moved from Australia to the U.K. to look for investments for our first European fund, and they a very fragmented water sector with more than 20 companies post privatization. So, we started [indiscernible] over the three years until we divested in 2006 to be able to be positioned to bid for Thames, which was the largest water and waste water [indiscernible] in terms of shaping and structuring the investments and constantly having assets come close to covenants et cetera. It’s a high touched investment class.
We’ve since invested in 50 loans for our investors, and we are now the largest specialist infrastructure debt manager in the world as well with $8 billion there in a team of about 30 people around the world in that. And then lastly, our MIM division manages about $4 billion in listed infrastructure and was a pioneer in that space. So, I think that covers a little bit of our approach in the fiduciary business. I might hand over to Ben Brazil next to talk about on the balance sheet investing side, the approach we take.
Thank you very much Shemara. So, we’ve got two case studies that illustrate the two areas of operation of our business. Firstly, primary financing where we provide capital and financing to support new activities, and that’s the energetics case study on the left, and then we have our secondary market investing where we invest in existing instruments, and that’s the constant text in which we have made our toll road investments historically.
So, firstly, Energetics, which is a UK business we first invested in a number of years ago, which provides the last mile of gas and electricity infrastructure between utility trunk lines and a newly built residential house. The UK has an innovative industry structure where that particular piece of infrastructure rather than being the exclusive domain of a local utility has been opened up to competition. And so, Energetics and other independent providers compete to the benefit of consumers to provide that last mile of infrastructure, primarily to new housing developments. And it’s relevant, that there is a real policy imperative in the UK to find ways to increase new housing supply.
So, it’s great that Energetics is adding its efforts and resources to facilitating and supporting that new housing development. And in particular, Macquarie’s involvement has led to a significant increase in the scale of Energetics activities. Since Macquarie became involved, we in Energetics have committed to approximately £80 million to support the infrastructure for new housing development, and we’re now providing utility connections for about 16,000 homes each year. That represents about 8% of all new homes built in the UK.
So, that’s great. Our secondary market investing case study is a toll road in Denver called the Northwest Parkway. We acquired 38% of the debt in this toll road, at material discounts to power or the original face value, primarily from the non-core part of European Banks who are looking to exit their exposures. The key risk we took on was traffic risk and consistent with macro and demographic trends of the market in which it operates, volumes perform very well.
As a result, the owner of the equity, Brisa, was able to refinance the debt, and pay our debt at par which generated strong returns on our investment, primarily as a product of the discount inherent in our original acquisition. And I think the next case study is Andrew's.
Thanks very much Ben. In keeping with the infrastructure expertise in the principal and funds management businesses CGM also has deep expertise in the infrastructure space and a long history. We have the number one ranked research team here in Australia and a very strong underwriting and distribution capability, which helps clients access the public capital markets. The first example here of Transurban, you can see - is a company with whom we’ve had a 20-year relationship. And last year, we helped them raise $1.9 billion. The largest capital raising in Asia-Pacific for an infrastructure company in 2017.
However, CGM can do way more than just capital raisings. And the second example here is, MGT, a 300-megawatt biomass power project in North-East England. Where Macquarie first met to the development team they had a loss on their place. They needed capital to progress the design and development plans and then they had to tender and close half a dozen commercial contracts, as well as raise $1 billion in term project finance all of which needed to be done within 12 months.
So, how did we help them? First of all, we provided them with the development funding. Moreover, we worked full-time with the management team to tender and negotiate a suite of bankable commercial contracts. Notice No small feat - on a plan, which is a world first in terms of construction sale and fuel requirements. There were many risks and challenges that needed to be overcome.
Firstly, the fuel supply needed to be secure and when all the major European utilities withdrew from the tender, using the expertise about commodities team we arranged a 15-year wood pellet supply contract from North America. This of course introduced another risk of currency exposure to which we executed a long-dated foreign exchange hedge.
We had to deal with the construction and contractor risk and when the initial contractor went insolvent, just a few weeks before close was due, when negotiated to buy the design plans, retender the contracts and then put together a consortium of two construction companies to deliver a bankable solution. Another risk was how to construct a power purchase agreement, given there was no President for the U.K.'s contractor difference for biomass projects.
Using the expertise of our power desk in the UK, we developed a PPI for the project from scratch and committed to a 15-year transaction, and then after all that we had to deal with the risk and ultimately the reality of Brexit. So, we identified a value-added price image, the risk procedures, a result of that decision, including a 15% decline in the pound, and managed to get around 30 commercial and financial counterparties comfortable. The end result was that we secured the required capital and closed the project two months after Brexit. This project was a joint effort between CGM and MacCap and Tim, I think you’d showcase the combined capabilities of Macquarie Platform.
Thanks Andrew. And yes, Macquarie Capital and CGM did lots of transactions together across infrastructure and ACM, and it was a great example of one of their best. Infrastructure is the biggest business within Macquarie Capital. It has been over two decades in the making and it’s something that we’re very proud of. We have over 220 transaction executives globally who specialize in infrastructure. From a client adviser perspective, we are the global leader.
We were ranked Number 1 in 2017 globally, advising clients on just shy of US$50 billion worth of deals. MIRA remain a very important client of Macquarie Capital. We have a very close working relationship with them. We also have deep relationships with the largest infrastructure funds in sovereign and pension funds globally. And in 2017 alone, we advised or financed around 80 separate clients.
I think one of the unique characteristics though of our infrastructure business is that we have a combination of traditional corporate advisory bankers who sit alongside our in-house technical engineering and operational experts, and they really help us assess risk and opportunity in developing and constructing infrastructure assets.
We very much see Macquarie Capital's role as hoping to create assets through both the development and construction faces. We actively use our balance sheet, provide equity as a sponsor and a developer. Importantly, we understand the needs of governments and communities to meet with their growing infrastructure demand and we have deep relationships with the global construction companies and operators, and tonight we currently have about $10 billion in infrastructure projects under construction or development globally.
Governments trust us to help them deliver on their needs for infrastructure. I would like to just quickly highlight two transactions as outlined on the slide. The first one is the black and blue tunnel in Rotterdam. As the majority sponsor, Macquarie Capital led the consortium and all of the government interactions. This is a complex five-year construction program with roads and a tunnel. Importantly, the reason why we won was the quality of our submission not price.
We led all of the technical and engineering seminars to achieve the best development value and we also took learnings from other PPPs that we have participated in to provide in-house maintenance solution, which created additional value for us. Secondly, in Mexico, we have acquired Norte, which is a combined cycle gas power plant in Mexico. The complexity here was that we stepped into a partially constructed plant, which was experienced in major delays and running out of money.
In what was a very complex transaction over 12 months, we again leveraged this combination of banking skills and deep operational and technical skills. We appointed a new contractor on a partially constructed asset, which is quite a challenging proposition. We bought in GE as a new operator. We navigated quite complex insolvency proceedings in Spain and Mexico and fundamentally we raised the financing for the project.
A combination of non-recourse debt and then used our own balance sheet to acquire the majority of the equity. That asset today is now a very attractive asset to the market for the more natural long-term owners of infrastructure assets.
So, in summary in terms of our infrastructure business, from a client perspective we are the global leader in infrastructure advisory. And secondly, we are unique. And then we have deep engineering and operational and technical skills that really enable us to use our balance sheet to help develop infrastructure assets globally. In terms of what’s next for our business. As you have heard earlier, there is $200 billion of dry powder to invest in infrastructure assets globally, and that’s combined with a huge demand by governments to upgrade that IG infrastructure. The challenge for us is to connect that capital with those deals, and again ideally, we’re doing that at the early development stages of the assets where we can really create value. Shemara, what’s next for you in infrastructure?
So, for us, I guess it is three things I would mention, one is, continuing to raise and deploy the regional funds, which is how our model has been. I mentioned earlier that we are getting the highest levels of raising each of our funds is a record raising size in the series at the moment, which is showing a little bit what’s going on in the broader sector, but also the trust and support that we have from our investors.
Secondly, we’re starting now to, at this point of the cycle see investors barbelling where their interest is in investing. So, there's a lot of interest in super defensive assets and we are raising a series of funds called SuperCore infrastructure funds that are investing in very defensive utility-type assets. And at the other extreme in our core funds we’re having to be more proactive and do more complex transactions take private's breakups restructurings to drive value.
So, I guess that’s the other feature and then the third thing we’re noticing in the infrastructure equity is that last year we generated $15 billion of investment opportunities to the question about investment opportunity in the current market, but only 6 billion of that was done by our funds. So, we’re generating a lot of investment opportunity and we’re starting to put together separate managed accounts for our larger investors who are evolving to wanting to invest as set by asset on a discretionary basis and organizing those to put investment into funds. And then of course, we are continuing to grow the infrastructure debt business.
And we’re expecting a continuation of our buyers towards the spoken less liquid situations. So, away from the newer [ph] more liquid instruments, albeit we’re always positioned to take advantage of any volatility in markets or asset prices to the extent that that does emerge. And Andrew?
For CGM, there will be significant opportunities as the private sector plays a greater role in the infrastructure over time. There is clearly a very significant investment in infrastructure required. Some of which will continue to be supported by government, but increasingly we think private sector will be asked to step up and markets will need to price and source both risk management product and capital.
In the case of MGT, which we highlighted earlier that involve foreign exchange, fuel supply, power marketing contracts, as well as interest rate hedges, which of course will become way more important in a rising interest rate environment.
With infrastructure investment happening around the world and increasingly to access global markets to source suppliers of construction imports or term contracts for fuel supply or even investment capital, CGM is well placed with capabilities in all the major markets. To source and supply physical contracts, risk management products that ensure consistent returns for asset investors rather than volatile merchant returns. This in turn should assist with raising efficient capital for each of the assets.
In the interest of time, we may pause there and we can circle back at the end for any other questions. Before I hand over to Nicholas we moving out to the Energy section of the presentation now. We will give another short video highlighting our staff in the sector as well.
Okay. With a lot of people, you heard talking about our expertise, as we know energy is a massive sector. It is a sector that is changing, we have heard about the change from coal to gas obviously we’ve seen in the United States, and of course the green change taking place now globally is very, very significant. In terms of the Macquarie people, we’re going to hear from the group heads as we have therefore, but you can see on this slide some of the big numbers in terms of who we are and what we’re doing. Obviously, in terms of the growth of our energy business very much driven in terms where commodities and global markets grew the business from in the early 90s. Therefore, that very strong position in gas and power in North America, which we highlight there with that number to position that we have in North America.
In terms of the other divisions, we can say from the Macquarie Capital viewpoint, obviously the strength on the traditional advisory side of the business bidding increasingly the development of this green energy initiative around the world. Obviously, the acquisition of the green investment bank allowed us to step-up our expertise in that substantially in Europe and it’s very, very active across the globe. Asset management of course as Shemara's team has been very reactive and we detail what we’re doing there, and in terms of corporate and asset finance we’ve seen the opportunity in terms of the meters, but obviously as you heard on that video we are growing to a whole range of about the sectors as well.
With that I will just go to the next slide, just in terms of the timeline talking about the summary of that. And again, on this timeline you can see the point in terms of where we were in 2012, and how the business has grown since, and even though we had very substantial businesses back then. You can see the underlying growth taking place on that slide.
Now, I’d like to hand over to Shemara to take us through Asset Management in this space.
Thanks, Nicholas. I was mentioning when we talked about infrastructure, how we’re having at this point of the cycle to find more complex value adding transactions to deliver superior return for investors and that’s very much the case in core energy utility. So, we thought we would talk about this Viesgo example of an example of where we are pushing the envelope in doing something more complex defined returns. So, this asset was owned by E.ON, the German utility and it was spinning out their Iberian business, and one of the big things E.ON wanted was limited impact on their wider business.
So, complex transaction for many, many reasons it was a €2.5 billion asset, it involved not just distribution, but a lot of generation in both conventional and renewable energy. The Spanish electricity market had gone through significant reform and that was challenging for a number of bidders, and then importantly as I said E.ON wanted a clean lift out. So, someone had to put in place risk management function, the finance function, the IT function and the fact that we had done this with E.ON in 2012 when we bought the backbone German transmission infrastructure Open Grid from them gave them confidence we could deliver doing that after we just bought wells in the West in the UK, some years earlier and done the same.
And so, we were able basically to dedicate a team of over 25 of our staff throughout this acquisition and then after the acquisition through the integration and transition process, and within 100 days we had the business rebranded from E.ON and it now runs with its own liquidity management, health and safety functions all of this replaced and running, including assistance from our colleagues in CGM on the energy trading side. So that’s a sort of a thing we’re doing in complex transactions in energy. We also wanted to know each day with the need for new role example have been looking at the renewable space long before it was fashionable. So, this was back in 2005 in our first European fund.
We invested in biomass and landfill in the U.K., in solar in Spain in wind in France and delivered excellent returns for investors out of that portfolio. And so, going to the next slide that all came together this year. Too many transactions happened. We bought EDC in the Philippines in 2017. Now, we not only used our complex transaction expertise in our knowledge of renewables because this is a largest geothermal asset in the world, but we also use the experience we’ve developed in the Philippines here, so now to Richard's question about local expertise in Asia. About five years ago we together with the government pension plan in the Philippines set up at 600 million dedicated Philippines fund, we’ve done six investments in that, but we got to know the local market and players very well and first gen who own 40% of this listed company then became very comfortable with us following other experiences together to do this 47% tender offer for the listed company.
And that was the largest tender offer in the Philippines and the largest in the power sector in Asia and driving very good value for our investors. So, in the renewable theme, I thought I had to mention because this was also a recent thing last year the green Investment Group Investment. Now that was led between us and Macquarie Capital and we were uniquely paced, it required a whole of house approach that really only MacCap could lead a consortium to put together and we bought this for 2.3 billion. And before I hand over to Tim to give you all the color on that very complex process that we were able to successfully close, I’ll just mention in asset management we have now a 1.1 billion offshore wind fund in pounds, and a £200 million fund with the UK government to invest in renewables in developing regions that we have just done first investment in India in that. The most appealing for us is, we were able to bring our team of experts to add to our already deep pension renewables and help us keep growing.
So, Tim, I’ll hand over to you to [indiscernible].
Thanks Shem. As Nicholas and Shemara have highlighted, we have been a material participant in the green energy space for a number of years. The acquisition of the Green Investment Group is another step in that evolution or albeit a material step is something that we’re very excited about. The UK government trusted us with their creation as the world's first green bank. And we are willing to commit to invest more in the future and not only maintain geology, but to grow it. I would say that Macquarie was the only one that had the technical and financial expertise to do due diligence on the 40 separate assets in such a short time frame ranging from debt, equity, investment in funds, assets that were development construction, and operational.
Since acquiring the GIG, we have integrated the team, we’ve led over $1 billion in green investments and have expanded geology beyond the UK, and particularly into Europe and Asia. From a transactional perspective, green energy is growing faster than infrastructure and it now accounts for over 40% of infrastructure deals globally. And consistent with hopefully - with what you heard me talk about earlier in infrastructure, we Macquarie Capital really see our role as combining our balance sheet and external partners with our deep in-house technical expertise to help create assets, again as a developer and/or through the construction phase.
We have over 130 transaction staff with 80 of them having engineering, technical, and operational expertise in renewables. Tonight, Macquarie Capital have under either development or construction of the 10 gigawatts of renewable energy globally. Approximately 7 gigawatts is an offshore wind, and that will require about US$35 billion of funding to be sourced. The balance of about 3 gigawatts is made up of solar, onshore wind, waste and biomass and that will require about US$6 billion of funding. Importantly in Asia alone, we now have approximately 3.5 gigawatts under development or construction and that is from basically zero, only three years ago.
Fundamentally, we believe we have real insights that is helping to turn green energy into an acceptable asset class for institutional investment. We have insides into new technologies. If you take offshore wind, say only five years ago, this was not really an asset class that was institutionally accepted. And we’ve helped make that transition happen through our technical expertise, and our infrastructure heritage in being able to de-risk projects. And you heard from Jack Doh from Macquarie Capital in Korea on the video earlier, you have we are doing the same thing today the waste industry in Korea through turnkey contracts and creating stable cash flows. And we are now looking at new technologies like floating wind farms and floating solar energy, and how we can de-risk those new technologies.
We’ve also been active in the oil and gas price and in particular I will highlight the acquisition of Quadrant Energy in Australia. I like to make two points here. First, we work with very long-standing clients and relationships with Macquarie Capital. Apache was the seller, a great client of ours. We knew that we wanted to dispose the asset and we would be thinking about how to help them on this for a number of years. Brookfield and Wesfarmers, again, fantastic long-standing clients of ours who we brought in as our partners. And really putting out balance sheet alongside our client and our advice to create real alignment of interest.
And finally, Alcoa, now again a long-standing relationship diving back to 2004. We had a deep understanding of their energy needs. And this resulted in quadrant entering into a long-dated gas supply contract with Alcoa, giving the insecurity of energy supply, and giving Quadrant long-term stable cash flows with a creditworthy party. Second point I would like to make is, bringing up infrastructure mindset to this asset. A good example of that was when we restructured the Varanus Island gas processing plant, and we introduced a long-term framework for gas processing for both Santos and Quadrant through the introduction of a tolling mechanism.
And more broadly we are driving a whole of asset life velocity to the Quadrant business. We sit on the board of the asset [indiscernible] was on the video early for Macquarie Capital is chair of that asset and we remain actively involved in the management of this investment and we’re excited about additional growth and investment opportunities for Quadrant. Our overarching objective is to create stable cash flows and to de-risk the asset. We were able to achieve that on a gas front for the Alcoa contract. And on the oil side, again we are able to work with Andrew Downe and the CGM team to provide a hedge. And this is obviously a core business for AGM, and part of a larger energy business, and again it’s another example of the joint work that goes on between Macquarie Capital and CGM.
A - Nicholas Moore
Thanks Tim. And that is correct CGM's expertise, obviously in energy does fan risk management product, but it goes beyond that into physical capabilities and capital markets across the globe, allowing us to offer risk and capital solutions for clients such as the first example in these sides of the Heide oil refinery and petrochemical complex located in Northern Germany. When Heide is providers of working capital, as well as they are suppliers and offtake of physical product all failed, we were able to partner with Heide to really understand their business.
Under our relationship with the parent company clash, our respective teams work together day-to-day to operate refinery, optimize refinery's capital structure, and overlay an efficient risk management structure. We entered into inventory monetization transactions that involved us procuring a cargo approved every week, destined for the refinery and buying and selling refined products on a daily basis. To balance the refinery's production and sales requirements. To accomplish this, we are dealing, not just with Generic crude oil, but rather 30 different products and grades on location in Northern Germany.
And then more strategically, we’ve entered into bespoke long-term refinery margin hedges tailored to track the actual real physical refinery margin of the specific refinery. Of course, none of this would be possible unless we have the people, expertise, and product capabilities across the spectrum of physical supply and offtake, bespoke derivatives, and capital solutions covering all the different geographic regions. The acquisition of Cargill's Petroleum business and the North American Power and Gas business has continued our buildout of our physical capabilities and in case of Heide this was to supply market specific products with particular specifications, locations, and delivery schedules. And the people have added to our geographic capabilities and increased our insights and did a very particular supply and demand situations. All of this, gives us more people, more expertise to provide clients with solutions that combine capital risk management and physical contracts.
And Gary, I think this team of people and expertise extends across to CAF as well.
Well thanks Andrew. I'm going to tell an interesting Macquarie story. It’s basically that in all our businesses, starting small and growing as we learn things. So, Macquarie Capital and was working with a large utility in the UK that want the drive costs out of the ownership and provision meters in the UK. Meters went off the regulated asset base that made this transaction possible. They tended to spit UK into 7 regions and MacCap won one of the sectors in North London and East Anglia.
We stepped into the contract. What is important to remember is, we just had a contract. We had two people with industry experience. No, substantive systems processes refurbishment center. We immediately started recruiting from the industry whether it’s utilities, manufacturers, et cetera to get that key experience, which makes a difference in assessing credit risk, and asset risk. We invested heavily in refining the processes, and setting up logistics and refurbishment center in the mid of London, which is quite unique and quite unusual in today's UK metering environment.
We started slow. The initial contract was probably £100 million being installed over two, three, four years. We were happy with that. In about 2006, we were thinking about smart meters coming into the market. That would ultimately come in the residential space, so we had to online around the particular risk and rewards. We started working with commercial enterprise, as to fund smart electricity meters. Now, as you can see from the slide, we’ve been relatively successful with about 600,000 in stores.
Coming more involved with our risk management framework understanding of it, we approached National Grid, which are on the OnStream portfolio and this was a traditional major portfolio, not a smart meter portfolio. I persuaded them to sell it, and basically tripled our book, and we had immediate scale. We started like most Macquarie people moving into adjacencies. So, funding distributed power, storage any efficient assets in the UK and Australia. More of that in the subsequent slide.
And our UK government in 2015 mandated the compulsory rollout of smart meters for consumers. So, the smart meters were coming. More or less in what we’d envisioned a few years earlier, when we bought the National Grid portfolio, we’ve been relatively successful winning about to install about 9 million residential smart meters in the UK. So, what we’re particularly proud of is we’re touching 6 million UK homes and commercial enterprises providing meters, which are the cash register of the industry.
Now from a relatively small matter in the home to a much larger asset on a roof in the UK. Ben, what are you doing?
Thanks Gary. So principal finance recently developed really from scratch a portfolio of residential rooftop systems in the UK, totaling around 13,000 individual systems. And these systems were provided to the home occupier at no cost. And in fact, delivered free electricity to that occupied during the periods of the day when the solar panels were operational. So, very compelling offering. Supported of course and made possible by the UK’s carbon emission reduction scheme. Our portfolio helps avoid around 11,000 tons of emissions, each and every year.
Well as that we also saved UK households sort of £3 million plus electricity bills each year, the merits of the offering need to be sold, and the systems needed to be installed pretty much rooftop by rooftop, you know house by house. And that’s where the entrepreneurship of our team really came to the floor. And having developed the portfolio, we were recently able to exit it to a long-term infrastructure owner and generated great returns to our capital and to our efforts. So that’s a great story of taking an opportunity all the way through its life-cycle from the very beginning. But unfortunately, having now realized the investments, we have to look at ourselves and ask what’s next. Fortunately, we’ve recently gained some traction, not a similar program in the UK to provide battery storage, often aligned with industrial that scale solar to industrial users. We’re hoping that in future years that will be the sort of success that we discuss in a forum just like this. And Gary what’s next for you?
Well three key things, really shifting to distributed power. You can say 30% of energy consumption is increasing by 2030. Not a statistic, which is not on the slide is that by 2020 42% of world power would be distributed, about $200 billion per annum. That’s an enormous opportunity distributed power could be solar batteries, CHP win small scale gas and diesel on and off grid. So, a fundamental opportunity. The second opportunity is the connection, because of naturalization, digitalization, and Internet of things all devices are becoming connected. From that simple smart meter with an eye seen in and a communications device, through to a phone, through to any device in the home, a fridge, a pool pump, they are all being connected and monitored and measured.
So, we’ve been working both in the UK and Australia through the retailers in some of the major introduces and developers to basically fund those assets in smart homes and smart businesses. The opportunity is endless. We’ve been working Australia that much; however, it is - probably in the retail sector. It’s actually working with one of the major retailers to find needs about thousand homes, solid panels on the roof of batteries to go off grid. You can see increasingly battery storage, commercial enterprises, we’ve been involved in funding those with the manufacturers and those customers. Load shedding, that means many things, but in the consumer sector it could be simple as turning off your pool pumps at certain times during the day to cut lower on the Grid, or alternatively, dialing back the air conditioners. This can all be done with the increasing connection of these devices linked by ICs, demand management and so on.
And the final thing is the shared economy, which I am really most excited about. We’ve been in business financing and leasing assets for some time and traditionally refinance the ownership of an asset. We’ve been trying to convince customers that don't need to own the asset, just need to be able to finance the use of an asset over a period of the assets life-cycle, not the full life-cycle. Very important to drive extra turns from the business. And so, there is some very live statistics here about that sharing economy. It could be a many service contract. So, one of the structures we’re looking at, and the deals we will execute over the last two or three years is particularly in Australia, which will drive the point that rather than be paid on a pound per use or a dollar per use, you are being paid based upon the savings. The energy savings or the savings where the industry or assets involved in. So, with the manufacturer and the major retailer and the customer, we’ve been involved in installing solar panels on the roofs of factories around Australia, LED lighting in those factories, that’s been a win-win for all three people such that Macquarie is being paid based upon use. Based upon energy savings. That style of transaction will be fundamental and it’s really just a wave of opportunities coming through us.
So, now I would like to finally hand over to Shemara, and just see what’s next in your world. Please Shemara.
Thanks Gary. So, energy has always been a big part of our core infrastructure investing in the equity ended side. I think about half of all our assets, nearly in infrastructure assets are involved in either generational articulation of energy. So, we will keep investing more in energy and that’s partly because of the demand for new build. I have got an AIIB stat here that says that there's 18 trillion of new investment required in Energy in Asia alone, in the next two decades, but also potentially if there’s cyclical rotation in listed equities away from yield assets to more growth ones, it could mean there is opportunity as well to invest in the developed markets in listed assets.
So that’s in our core of funds, but also the other thing that’s quite exciting is we’re looking at a new initiative, which is putting our toe in the water in upstream energy funds, which is a bigger space than infrastructure. And we’ve had a team from Andrew Downe's business in CGM move across recently into the asset management business, bringing with them 15 years of experience. Some doing 85 investments, I think Andrew with $4 billion in upstream oil and gas investments where they’re doing development, delineation of projects. And so, they’ve just come across to us and we're thinking we can take that out as a fiduciary offering to our investors. Because we think there will be a lot of interest in that. We’re clearly going into a very big established phase, but we think their track record should position us to start raising funds for you.
So, with that Andrew, I might actually hand back to you to [indiscernible].
Sure. All of CGM's businesses are really geared around adapting to change. And for energy not only is the world's demand for power increasing, but the way we produce store and consume power is all changing. In just a few years, the US has gone from an importer of gas to an exporter. What does this mean, well it means new pipelines are having to be built. All pipelines are reversing direction of flows. For example, the North-east of the U.S. seems to be a net importer of gas. Now, it’s a net exporter of gas. Terminals that were originally built to import LNG are now being reversed to export LNG, an example of that is the Freeport terminal, which started off as a relationship on the trading side between CGM and Freeport, which subsequently became a client for MacCap who arranged the significant development finance to convert the terminal to an export terminal.
And with the growth of renewable energy, and demand to reduce environmental impact of traditional fuels, clearly gas-fired generation, which can step in at short notice when the sun doesn’t shine or the wind doesn’t blow has growing importance, which bodes well for our position as the second biggest wholesaler of gas in North America. We see this continued fundamental change in the energy markets driving increasing client demand for capital and risk management solutions.
Tim, what about what about for MacCap?
Thanks Andrew. For Macquarie Capital, what’s next? Three things. Firstly, understanding new technologies in green energy back to the storage being a very good example of that. Secondly, again in green energy new markets with a particular focus on Latin America. And then thirdly, we’re also seeing this increased convergence between conventional energy produced and green energy players making sure that we are part of that convergence. Thank you.
So, we might move straight to the technology section. We’ll save the questions to the end of the briefing for energy and technology. Moving into technology, before I head over to Nicholas again, we have another short video highlighting our expertise in the technology space.
Quite a few people around the group and as you can hear technology impacting all our businesses and all our clients’ businesses and obviously the sections we had before in infrastructure and energy assumedly being impacted by technology. As a group, we’re spending about $1 billion a year on technology. Very big spend and we are delivering better faster cheaper outcomes for all that customers we’re dealing with. From a wholesale business, we will hear about the impact it’s having, it’s allowing us to process a lot more transactions at a lower cost than we have done before.
From our retail viewpoint, you will hear shortly from the team. It actually allows us to create products we just couldn't do before, not only we are going to be delivering better products to clients, but we couldn't even reach the clients before. So, it’s a very exciting story in terms of how technology will impact on us. Nicole would take us - Nicole is the Chief Operating Officer, if you know, at the end of the table will take us through that and as well as that we've got Justin Moffitt in the audience for any other specific questions. Nicole?
Okay. Thanks Nicholas. We’ve made significant progress over the last five years to allow our businesses to build on expertise and enable them to pursue opportunities to develop enhanced, and often first to market service offerings. This is being driven by our investment in workplace, our investment in our people, in our core infrastructure and also a significant investment in our platforms. As you can see on this slide, we have made several senior strategic hires, including a new CIO, Justin Moffitt. We’re also very heavily focused on the continued education of our people. So, they can drive the next generation of change.
We can see on this slide the types of opportunities this has enabled the operating groups to pursue. BFS have undergone banking modernization program and this commenced with the core-banking program several years ago. CGM have been continually investing in their platforms and CAF have also expanded on their deep expertise in motor vehicles, and develop platforms like MotoMe.
MacCap have also been partnering with entrepreneurs for over 20 years to support technology innovation. The core to this success has been the closet collaboration with COG. And as Nicholas mentioned, we have spent about $1 billion each year on technology, and we have done so for several years. This includes, people hardware software, and market data costs. And we expect this level of investment to continue. A material portion of this spend each year is for new investments, and new projects, but we also ensure each year that on a like-for-like basis, the running of the maintenance costs trend down.
So, the end result of this is, each year we’re able to deliver more for this level of investment. A starting point for all of these is, we have a relatively clean technology base. And this means that the investments we make can take advantage of new opportunities and drive new pockets of growth. We are early adopters of technology and this has driven a lot of opportunities across the group.
We’ve adopted a cloud for strategy and we have over a third of our infrastructure environment today running in the cloud and we expect that that will increase. We’ve also developed an open API architecture, and that allows us to securely connect partners with our data and our systems. And so also starting to transform the way our clients can use their own data, and we're going to hear shortly from Gary and Craig more about these.
We’ve created a differentiated work environment allowing our people to connect easily and this is increasing collaboration and innovation. We are one of the first globally in financial services to use workplace tools such as Office 365 and workplace by Facebook. And we partner very closely with the operating groups. We are they are trusted advisors to enable them to deliver on their strategy whether that be the best ways to utilize technology or through providing expertise in emerging technologies.
We saw in the opening video Dan Phillips from Macquarie Capital talk about the focus on cybersecurity investments. So, we currently have a technologist from our team embedded within Dan’s team who is advising him on this technology. Over 60% of our staff are directly aligned with the business, and so the focus is bringing the business, the technical expertise and ultimately that is allowing them to get the best outcomes for their customers and their businesses.
Gary, you’ve been doing some very innovative work in technology, particularly in the motor vehicle space. I’ll now hand over to you.
Well thanks Nicole. And COG, who are well and truly our partners in business here. Technology is disruptive in changing the world. We need to be head of the curve to know what is happening of for better solutions to our customers. I'm going to talk a little bit about MotoMe. Essentially, it's a sophisticated machine learning to identify patterns and differences from data, customer's preferences about cars, cars that we wish to own and drive. It’s virtually unique. We believe in straying string around the world. It basically is a car buying and financing ecosystem using digital, social and physical environments. Social, not just in terms of SMS, but through Facebook messenger and Instagram. Physical in terms of when the transaction is done, the customer can go to one for participating dealerships well in the near future one of our participating stores.
So, a customer, if you log on to www.motorme.com can type in a few details, postcode, where they are, family preferences. Through the algorithm machine learning, the system will actually pick a variety of cars that would suit the customer. We can arrange a very competitive quote and actually buy the car for the customer. If the customer goes a bit further, with automatic credit decisioning, and typing in some credit details he’s in full API’s with the credit agencies, we can approve the customer online on the basis of what the customer can afford.
So, the customer then knows what they can afford, they can actually buy with confidence. Ultimately, the car can be delivered to the home with one of our participating dealerships or possibly one of our participating stores. It’s a quite unique three-year investment, we've got partners in COG and the technologist in CAF. Portals. We go to market, mainly in the small ticket flow through introduces. So, we have been investing a lot of money again with COG in developing our portals in the UK and Australia in full agile methods, with fall API functionality pulling credit stats, as data, data to verify a customer. Very, very important. The functionality is really quite cool. It allows you or introduces to transact for the customers online.
It’s innovative, intuitive, efficient and very transparent. Automatic credit decisioning, we have been doing that for some time. We’ve had credit score cards swirl. So, al that offering better service the customer. From Macquarie's perspective, better decision making on the risk that we process and take. Again, through COG, we build full-APIs. Very, very important. We have been slightly turning on in certain business lines, certain credits in Australia, and the UK. Going slowly as we become more comfortable with the risk. It is a fantastic surface for introducing our customers, very efficient, they know when they are approved online and can make the acquisitional finance.
Now, I’m going to hand over to Greg, who has been investing a lot in technology and in APIs. Greg?
Thanks very much Gary. Technology is really important and we’re quite fortunate that we have got a great technology expertise in the BFS business as Gary does in his business, but also in our COG business a really substantial team under Justin and Nicole and we leverage that capability for the benefit of our business. Now if we go back a step of course in terms of banking, banking was about a big building to protect the cash, big banking faults an enormous branch presence and so forth. But no longer is that required.
We’ve been observing the way customers want to interact with their banks. And the way they want to interact more on more is led by their interactions with other service providers and more and more of those are technology-based companies. And so, with new technologies like cloud and advancements in digital technologies and mobile, we saw an opportunity to create a digital led bank, but importantly one with a really strong brand, and of course a full product suite and offering. So, very different than what had been seen.
So, what we have been doing in BFS is embracing those new technologies as a way of delivering exceptional client experiences. And it’s the exceptional client experience that will bring clients to the business and that’s been a really important part of the growth we’ve seen in the last few years in BFS. What I thought I would do on this slide here is, just take you through some of the investments that we are making because it’s these sorts of investments that have captured the interest of clients, and have led to the growth.
In terms of our leading digital banking experience, we think it is leading because there are a number of first in Australian financial services marketplace, including things like instant client push notifications and natural language search. And natural language search is an example of really powerful feature and clients seem to love this. So, if this time of the year you are trying to work out, what have I spent on the Christmas Holiday or what is my travel bill. Rather than going through all of your accounts and meticulously finding all the bank statements and credit card statements and adding it up, and trying to work it out, you just type in what did I spend on travel. What did I spend on Christmas holiday, and the system and calculates that instantaneously for you. So, really powerful feature.
We’ve looked at market leading technology companies and really companies that our leaders in client experience across a range of industries, and we’ve pioneered the use of DataStax technology in financial services. And this is the same technology that companies like Netflix and Facebook have used to create that really highly personalized and tailored customer experience that you probably get when you use those applications. Now one of the ways our customers see this technology in terms of our banking application is, we categorize all your income and expenses. And more than that, using machine learning it works out how you prefer those categorizations to work. And again, a really powerful feature, particularly when you get to your-end and you are trying to do your tax or just do a family budget.
Really, really powerful feature. Also using this technology, we’re able to store documents on the system. So, if you’ve got a warranty for a particular thing that you’ve bought that you want to keep, and you will need proof of purchase later on, you will be able to find that forever in your banking application. Every invoice or receipt when you pay can be stored online and you can make your own notes and commentary and of course typically banking systems are read-only access and all you get is the statement, and that is it. This is very intuitive, and as I say, it learns along the way in terms of the way you want to do your banking.
We’ve been recognized globally for the way we’ve implemented the API enabled architecture that Nicole mentioned with OpenShift technology from Redhat. And this is tremendously powerful, what this does is it enables us to deliver new features we can stand up in an environment in a matter of minutes. So, if we can stand the environment up and we are able to deliver new features and functionalities to clients in a matter of minutes. So, very, very powerful again. Clients benefiting, in the other way clients are benefiting here is, we don't need to take the system down. So that annoying message, clients normally get that the system is down for ongoing or routine maintenance. We don't need to do that with our technology because of this sort of technology. So, very powerful benefits to customers.
We’ve rebuilt our tech stack from the ground. The only Australian Bank to be doing that and I think the first in the Australian market at least to offer all of our lending products and all about positive products on the same 24/7 real-time core banking system. So, your mortgage product whether it’s a transaction account a savings account, a wealth deposit account, a business loan account all will be on the same call banking system and you can see that will offer us tremendous efficiencies and tremendous scale. There has been lots of development in terms of open banking, especially in the UK and Europe, but also here in Australia we will see a report, no doubt this month on that and we’ve built Australia's first open banking platform to give our customers a control over their data, and the power to securely use that data in ways that suit them, and we’ve already piloted the use of this with a company called Pocketbook, which is a personal financial management tool and our customers were able to use tools like that in a very safe and secure way. So, again great customer benefits.
Now, unlike a lot of the other finance institutions in Australia most of our business comes through intermediate recent partnerships. And we’re able to support their business objectives and allow them to create a very customized offer for their clients. And a great example of this is Woolworths Money. Now Woolworths use our open API architecture and they combine that with their customer rewards database and in that way, they were able to offer a tailored Woolworths Money banking experience curated alongside of the supermarket experience. Very, very powerful thing. The other thing we are able to do there is, to have unique branded banking experiences, and so we do this with most of the mortgage brokers in the country. So, brand’s like Aussie Home Loans and Mortgage Choice and Yellow Brick Road. We're able to almost give them a bank in a box solution to offer full range of banking services to their client base.
Finally, platforms, and platforms have become very, very important in terms of technology. Things like Airbnb and Uber and so forth, really dominant platforms. And we've been investing in platforms for a long, long time. Our wrap platform is a very significant platform, which has been the fastest growing platform for the last five years. In fact, we’ve won every institutional mandate that has come to market in the last five years. It is over $85 billion on that platform. And what we're doing now is, we’re moving that capability to real-time and bringing in a lot of the cloud and digital technologies from our personal banking suite for the benefit of advice clients, and advisers in that space. In business banking, we have our debt platform listed on the slide there. Really significant over 140,000 unique uses of that platform, incredibly innovative when it was launched over 15 years ago, and in fact launched before PayPal was launched in market.
So, a real innovation back then, and we’ve continued to invest in that platform. Just last year, we introduced auction pay. And this will change the way the customers pay for properties for options and offering tremendous benefits for our real estate agent clients. So, just a snapshot of some of the investments that are pairing the growth within BFS, and I’m going to hand over to you Andrew for some case studies in your team.
Sure. So, very simply technology is cool for CGM's capabilities. We demand and our clients demand efficient, reliable, dependable connection to markets 24 hours a day, six days a week, and in some cases seven days a week. And as you can see from this slide, transaction volumes have been increasing for us, up 22%, and released the technology that has allowed us to go out and grow the client base that’s driving the transaction volume increase and correspondingly transaction costs are decreasing down 23%. To achieve this, we need to spend money obviously and the moment we are spending more than $300 million per annum across the CGM platform on technology.
We process an enormous number of transactions every day and staying on the cutting edge of technology has brought us a competitive and a risk management necessity for us. And also, for our clients. We also have expertise in the technology sector in our research department to assist both ourselves and our clients with technology company investments.
And I think, MacCap have been doing an integral bit of that.
Thanks Andrew. So, in relation to the technology for Macquarie Capital, I mean vesting our balance sheet in the technology space has been a business that we’ve been in for nearly 20 years. We provide long term capital in partnership with tech entrepreneurs, and these entrepreneurs are individuals who we typically have a long relationship and history with and often having invested them on multiple occasions. We do not look to take technology risk per say. We are investing after the technology is proven, clients use it, and the company is generating revenue.
Over history, we have generally pursued two overarching things. Firstly, Internet and the impact of network benefits when business reach a certain market position, and that’s been particularly successful for us in the online jobs, and food delivery space. And secondly, software and it's a role in analyzing big data and Nuix on the slide is very much on that thing. Nuix -analyses unstructured data, typically email to help its clients with cybersecurity and forensic investigation.
We’re the major shareholder in Nuix. We’re on its board and we continue to be actively involved in this investment. We have in particular really assisted Nuix in transitioning from a relatively small privately owned local business to a material global business. We really help to institutionalize that business. We’ve helped in terms of people, including board appointments to drive our US business, and appointment of new CEOs and senior management. Macquarie is itself a customer and therefore, been able to assist Nuix production or product team on how to position their product with other corporate customers. And given the client base is typically government regulators and large multinational corporations, our branding assists with Nuix' overall credibility.
In terms of what’s next from Macquarie Capital in technology, we’re excited about this convergence between old-world industries like infrastructure and the impact that technology is having on them. And what is known as the Internet of Things, where the increased use of sensors and for all types of applications and the analysis of the data that comes from those sensors to improve productivity and efficiency and monitoring.
We believe we bring something to this area. Data is paramount, and through our infrastructure business, we have it. So, for example, we recently acquired a 50% interest in a business called environmental monitoring services. It’s a global leader in real-time monitoring of pollution and noise for infrastructure assets in particular airports. And so, we’re excited about what we can bring to that company to help it grow and the broader potential opportunities in that infrastructure takes place.
Shemara, over to you.
Thank, Tim. Well, technology basically touches all three key areas of our business. So, on the investing side, in MIM, as you saw Megan [ph] say on the video, we’re using better date on analytics to try and supplement our alpha generation. And in the MIRA business, you saw Liz O'Leary [ph] talk about across all our asset classes, how we're using technology to drive better outcomes.
Secondly, in terms of engaging with our investors, we are investing a lot in better transparency and dialogue with investors using technology. And then finally, in terms of our operational side back office and middle office, particularly in MIM, we are going through our whole global platform strategy rework. So that’s all from me, Gary.
I always say four key opportunities that I'm sure there's many - much more than that by the way. Really with the onset of driverless and shared vehicles [indiscernible] the sharing economy, managed services earlier, the opportunities are endless. You can see a stat there that, by 2013, 50% of cars will be electric.
In Australia, at the moment, we probably have Level 2 autonomy for more of the luxury cars: brake assist, line assist, et cetera. And the manufacturers who we work closely with, because we're white-label financier for a lot of car manufacturers in Australia. Our thinking that in 2020, you'll have Level 4 autonomy. In other words, the driver will be at the wheel, but the car, in certain CBD areas where it's not in poor weather, will be at the drive itself.
Level 5 autonomy, where you don't need a driver on the wheel is expected to come out in the 2030s and 2040, but who knows. Irrespective of all that, we are very well positioned to actually be owning and financing this usage of assets and its increasing usage of ADs [ph] and autonomous vehicles.
Second key thing is the big shift from 4G to 5G. You will have heard of that. It’s been in the newspapers in the last week, but it’s been in the newspapers for much longer around the world. But actually, 5G is being operated by some of the manufacturers with trials for Europe, et cetera. It’s all about pushing more signals down the pipe with less power consumption and battery usage and an increasingly connected world, as I spoke about earlier, and with Internet of Things and an enormously stunning statistics about the Internet of Things and the driver of growth, frankly, the telcos and the equipment manufacturers need to finance this shift.
There's a spend of something like between 2009 and 2025, one of the estimates, global CapEx $225 billion per annum, [indiscernible] effect to - of nearly $200 billion per annum, so a massive shift. So obviously, we can be involved in the solutions in terms of phasing out 4G for our clients and funding the 5G. Another thing - key thing with that technology is health.
Last time I looked, we're all getting older and unfortunately more things go wrong with us. But - for good reasons, we can be diagnosed very quickly. Now Tim was talking about those sensors, sensors, I think, in airports, checking out noise and pollution and things like that. Well, sensors are available for the body. It's a simple probably integrated circuit with Wi-Fi that can actually measure your heart rate, your blood pressure, chemicals, hormone imbalances, et cetera. They can be through the Wi-Fi, again, Internet-centered device like this, so you can work out what's going wrong with you.
Hopefully, you liaise with your doctor; hopefully your doctor liaises with a clinic, if that's - goes that serious. But there's enormous opportunities here, and the spend with new IT and telecommunications is enormous. Now we've structured transactions, where we funded day clinics, whether it's oncology and laser treatment, or just surgery where we actually promised to a hospital or medical unit that they will have started out technology for 10 years and we refurbish it and refresh it constantly, but were paid for years per surgery or power laser treatment.
And the final thing is really big data. Everyone in Macquarie is using big data, defining the data, interpreting the data with APIs getting further data and using algorithms. It’s all about customer behavior. If we can understand what our customer wants before they tell us, we can hopefully offer better products and solutions to that customer. In terms of the assets, we like to own and finance assets for our customers. With supply and demand different micro and macro factors around the world, utility of assets is changing dramatically, and we have to be ahead of the curve on our risk positioning actually make sure that we're funding assets that make sense.
But we can also on the flip side offer better products and solutions for our customers. And of course, Greg is actually spending - investing a lot of money in technology. So, Greg what’s next for you.
Yes, exactly, Garry, more of that investment to benefit customers. We think customers are enjoying that digitization journey that we're on. We're getting a lot of good feedback from customers and some very encouraging growth. So, we are going to continue that digitalization journey and that investment, because it is working for our customers and working for us.
And more specifically, in the personal bank, we see a long way to go in the terms of mortgages. Mortgage is one of the slowest products to get for a customer and one of the most expensive products to put on the books. So, we think there’s a big opportunity to continue the work we’ve done in mortgages. So, we will continue investing there.
In the wealth space, the Wrap platform. So, we’ll be replatforming a number of the applications within Wrap, and we think this will be tremendously beneficial for the advisor clients that we work with and institutional clients and also the their clients. So, it will be a big investment to take place there.
In the business bank, we’ve got some wonderful platforms. And I exampled earlier the DEFT platform, which is great for real estate agents, strata managers and so forth. We'll be rolling out some new platforms that will benefit our other segments. So, some wonderful benefits from our investments there across the three businesses within BFS in terms of client experience.
Of course, the other thing that this investment is doing is yielding benefits to our business. In 2012, the BFS cost to income ratio was 82%, sorry, 85% and that’s fallen now to 69%. And over that period, the cost base has fallen 1%. So, the total cost of BFS has gone down 1% from 2012. So, we are getting some efficiencies. Now, we are seeing more driven dramatic efficiencies in the areas, where the investment is going.
So, in the personal bank, back in 2015, just two years ago, the cost of revenue was 70%. This current year, it’s 50%, we expect that to fall below 40%, as we continue rolling out some of the technology. Why don't we wrap - I'll hand back to Nicole to wrap up technology.
Okay. Thanks, Greg. Our first area of focus is automation and really accelerating the automation journey that we’ve been on. Research shows that if Australian companies accelerate the rate of automation by 2030, there is $1 trillion boost to the Australian economy. And then in addition, if they also actively reskill their employees, there is a further $1.2 trillion increase.
We have already been automating a lot of our processes. There're some great examples today in Gary's world, also in Greg's world, as well. And for us, it is about accelerating that, but automating more complex processes.
For example, in my own world, in the operations world, we are currently experimenting with automation and artificial intelligence technologies to automatically read, understand and process complex legal documentation and contract notes from our counterparties without any human interaction. But importantly, we do have a strong focus on educating all of our people and continuing that reskilling on new and emerging technologies. So, they can find the opportunities and this is consistent with our bottom-up evolutionary approach.
Finally, the other area that we're really focused on is big data and analytics, and not only gaining insight into our operations, but insight for each of the operating groups. And we’ve heard from Greg and Gary, from a retail and customer perspective how they are already using big data. But we are also using it in businesses like CGM. So, we have been using big data and machine learning to predict energy demand based upon weather pattern.
One of the benefits and what’s next coming out of the Cargill acquisition is that acquisition has given us additional capability. We have some data scientist, but also additional technology that’s now allowing CGM to get more sophisticated insights and we are now starting to look at how we can apply these across other asset classes as well.
Right. Thanks, Nicole. I’ll open up for questions. Obviously, we’ve covered two sections there, so technology and energy. Let’s start with questions on the floor.
A - Sam Dobson
Thank you, Nicholas. So, I will open the floor to questions. We will start questions in the room and then go to the conference line. [Operator Instructions] So, if I could start from the back, John?
Thanks. Jon Mott from UBS. A lot of the businesses you have got are interest rate sensitive and given that the same bond yields backup quite a lot around the world and potentially going higher, can you just run through business by business, how you expect this to drive the underlying operations, even across the five business units and the sensitivities to interest rates that you are thinking about across the businesses?
Sure, Jon. We might actually - we have the group heads here and they will be presenting in terms of the operational briefing. So, it is probably best to actually refer that question to them when we actually conduct the operational briefing on those various areas. Importantly though, from an interest rate sensitivity viewpoint, the big issue of course is what’s driving the step-up in interest rates, and if the step up in interest rates is being driven by economic growth, which you know obviously we’ve seen very strong economic growth, synchronized growth around the world. That’s generally speaking a positive story for Macquarie overall.
So, talking about the overall story, interest rate growth is a positive to Macquarie, economic growth has always been positive, and so we are leveraged to that. And in terms of the impact of interest rate, really is a business by business story, and probably best to have the group heads address that in terms of what were the issues, we are talking about that shortly.
Brian Johnson, CLSA. Congratulations on delivering 10%, which I think not long ago was going to be broadly in line. Nicholas, when we have a look at Slide 16, under Macquarie Capital, and this hasn't changed from the first half, it’s got solid platform of principal realizations expected. Macquarie has got a lot of money invested in that whole thing, MacCap, I can’t recall and even in the commentary today you made on the division it doesn't seem to be anything really comes from this quarter, but it’s still sitting there as guidance, is that implying that we should expect some of these realizations before 31 March? Or are they potentially being deferred?
Absolutely. Brian, I mean the realizations are taking place all the time. Obviously, we don't list every realization. There is a lot of investments there. There is a lot of co-investments there. So, yes, we are experiencing realizations, we will expect to see realizations now between now and 31 March.
And Nicholas the gain on those realizations that isn't booked in one year, does it end up being booked over many years?
Now the realizations, when we don't revalue that book. We basically only recognize the income when it’s actually realized. So, when it’s sold or whatever happens to it, repaid.
Thanks Sam. Andrew Lyons from Goldman Sachs. Nicholas just a question on equity deployment opportunities within the MAM business, it’s another quarter where you’ve raised more equity than what you’ve deployed. Can you perhaps just talk about trends you’re seeing in markets in just the extent to which I guess elevated asset process making it equity deployment more difficult at the moment?
A bit of the mention. We have Shemara who will be talking shortly on Infrastructure and that’s probably a very good question to be putting to her. As you say, we have $15 billion of dry powder in that Infrastructure business. We’ve had a very strong quarter in terms of raising $7 billion of capital. And as you say, we did deploy 4 billion, which is a very good level of activity, but 4 billion is less than 7 billion. So, therefore we’ve seen the amount step up. So, it’s a good position that we’re in, but Shemara can address it specifically I think when we talk about infrastructure.
Good morning. Richard Wiles, Morgan Stanley. Nicholas why describing the conditions in the quarter is satisfactory? If you read the divisional commentary, it sounds like Macquarie Asset Management was pretty good and Macquarie Capital was good, BFS was good, I mean what do we need to get for you to describe the conditions as better than satisfactory?
Well, I think we all would agree it’s satisfactory. I mean, it’s [indiscernible].
It’s Andrew Triggs from JPMorgan. Just a question on the outlook or the commentary around base fees in the MAM business are set to be broadly in line on last year. There was a reasonable growth in this quarter 2% to 2.5% in the first half was up 1%, so just your thoughts around why we're not expecting a stronger improvement in base fees at this time?
These are broad comments we’re making, I don't think we’re being precise to the last decimal point, but I don’t know. Shem would you like to make a comment about that. I think just an approximation is always there. Would you like to, I don’t know if you got that question Shem, it is, we are saying basically is we think to be broadly in line with where we were last year and the question is given, the assets under management are up well on base fees up as well.
Yes, we had quite a few divestments in this period. So, some quite large ones. And I think the Copenhagen’s, the Thames Waters, et cetera, so that's why we’re divesting at the rate we’re investing at the moment. And that is why the base fees is flat. We’ve got a lot of dry powder as you say, and that is actually getting invested quite quickly. So, the last iteration of the U.S. funds is being fully invested.
We’re raising a new one. The latest iteration of the European funds about 50% to 60% invested and we hope to be having that full and raising a new one later this coming year. And in Asia, we fully invested our last fund and have just raised a $3.25 billion fund there. So that’s why our dry powder is stepping up, but we’re not invested in anything not yet, we did a lot of divestments.
Okay I think the key thing is these are just - we're talking approximate numbers. We’re not being entirely precise here.
Thank you. Frank Podrug from Merrill Lynch. Before we get at the division heads, Nicholas, a question for you, what’s the one opportunity that most excites you going forward and what’s the one risk that most concerns you?
It’s a bit like the question about, which kid, which of your children would be like the most? Obviously, we like all these opportunities. We thoroughly review them. We test them. There is always risk around all of them, but we do feel very good about all our different businesses and in terms of the areas we are focused on. And one of the points that we will make is, we're talking about three particular themes today, but there is many other teams taking place and many other areas of expertise within Macquarie that we’re developing, which could be very, very significant for us in the future.
So, I would talk to say these are the only three areas that we are focused on. Actually, there is a lot of other stuff that we are focused on, but these are three we will talk about in a minute, feature prominently in people's mind. So, let’s talk about those three and we might have subsequent conversations on some of the other things that are developing.
Well obviously, as you know from a risk management viewpoint, we look at all our businesses and all our assets on our worst-case outcome. So, I would say, well this is what we got on our books. This is the activity we are running. What can go wrong here. And in recent years obviously, the risk for financial services has been very much on an operational or regulatory risk environment and that has taken a lot of effort and a lot of time for the industry broadly.
And as you know, we spent about $400 million a year on compliance in getting that right. It’s a risk that we’re focused on. Then of course you’ve got the normal market movements and valuation, as Brian's saying, of the assets to the book. We do spend a lot of time in terms of looking at our different books of business whether it be Macquarie Capital book, the Banking Financial Services book, the CAF book.
So, lot of time when we look at different market scenarios in terms of what can happen, and we ensure that we are comfortable with the risks that we are taking. And we have a very simply approach that if we’re not comfortable we don’t do it, because there’s nothing in our portfolio of businesses that we have to do. We’re only doing because looking at the risk reward equation we think it is a good risk reward equation. So, we don’t do things for market share, we don’t do things for long-term strategic drive as it’s very much driven by, is that risk return on that asset right. So, we use risk out and our risk management function is running across all our businesses constantly and actually doing that calculation to make sure we’re comfortable with them.
Just in the front.
Tony Mitchell, Ord Minnett. Can you reveal, how much you have paid for GLL Real Estate?
No, I don’t think - we can’t release that number at this stage Shemara? Shemara is just saying, it’s not material to Macquarie Group and we’re not releasing that information at this stage.
And can you make any comment about when you will initiate your buyback?
Yes, good question. I mean we obviously think about the buyback on an ongoing basis. We look at the opportunities we have to deploy capital and planning over the last quarter. We have deployed capital in the business and we have an acquisition, so there will be another deployment of capital. So, it is weighing up the relative return in terms of what do we think we can be getting on the activity we have now and the activity we can - I think we can see the opportunities, which we can see in the short-term versus buying our own capital back. So that’s an active discussion that we have and an active issue that we look at continuously, and it is very much flayed up. The way we do everything on an incremental deal by deal basis.
Okay, we will take one more question.
Brian Johnson, CLSA. Three sub-questions. With the change in U.S. tax rate, could you just refresh the currency sensitivity for Macquarie Earnings. The second question was, could you give us a feeling how much the bank levy cost in this quarter versus the quarter before having that it started on 1 July? And I was wondering Nicholas, like all the outlook commentary as much as the same as it always is, but I was just wondering if you could fill out just one bit. Just on the growth prospects for Macquarie?
So that’s currency sensitivity bank levy over the last two quarters and your feelings on growth opportunities. On the first two, I think we would have to come back because I haven't got those numbers to hand, but broadly speaking from a currency viewpoint, as you know given that the amount of overseas income we have, it 6% of our income is outside Australia broadly speaking. So, that usually flows through. It does depend obviously on the profitability of our local business versus our international. Historically, our international businesses probably have been more profitable. So, it is not a precise measure, but if you think about that in terms of the usual split income that we talk about. In terms of the bank levy, I haven't got that cost to hand.
We probably will have details of that in our full-year results. So, I cannot talk about. In terms of the growth Brian, what our presentation today of course is all about the growth, we will hear about our expertise we have; and in particular how that expertise allows us to grow into adjacent areas and grow our businesses. So, hopefully after today's presentation hearing from the group heads where the growth is taking place, you will have a much greater feeling in terms of what the opportunities are for Macquarie in these three areas. And as I mentioned before, importantly there are a lot more areas that Macquarie is working on these three particular themes that we are focused on. But hopefully our presentation is going to give you a feeling that how we go about looking at growth, how we go about assessing it, and coming back to this idea of genuine expertise that these businesses have.
And Brian obviously we have said publicly that the bank levy would expect to cost about $60 million to $65 million on an annual basis. So, I think that is obviously the guidance we provided and that reminds our guidance today.
Thanks Andrew. We’ll pause there for any questions. We will take questions from the floor and as the floor will then go to line, if there are any questions. So, Frank?
Thanks. Frank Podrug from Merrill Lynch. Shemara question for you, firstly congrats on 7.1 bill [ph], it’s a phenomenon result. It’s more than you did annually for many years. It’s a question on industry structure and return sustainability in the feature. Clearly, it is an attractive space infrastructure, but that’s attracting competition. So, Blackstone seeking to rise $40 billion half committed from the Saudi public investment fund, KKR, Carlyle, Apollo they are all making noises about wanting to be there. How do you feel about return sustainability?
Yes, look infrastructure is a space that’s actually growing structurally in terms of both demand for investment, Nicholas showed his statistics saying it’s 45 trillion of investment needed out to 2030, half of that in Asia. And also, in terms of demand for investing, you head Joyce BeLane [ph] talk on the video about just one investor who has made $65 billion allocation to this space recently. So, even though more players are coming in the asset class is growing a lot and we think it is a space where we are the largest player by margin. As I mentioned, it is really important to us that we maintain that by keeping our track record up with this active asset management, delivering outcomes for investors, so they keep reinvesting with us and delivering outcomes to communities, as we saw in all our case studies, so that we keep getting entrusted with assets and we can stay at the front of that curve, but we may have a smaller share of a much bigger industry, but we will probably still for the next few years hopefully maintain the biggest share of anyone and we will in absolute terms have good potential to just keep growing I think. Does that answer your question?
Craig Williams from Citi here. The Trump administration seems relatively nationalistic in its approach to diplomacy, does that make life any more challenging for the Macquarie Group as an advisor and investor in terms of accessing opportunities in the U.S.?
Well it hasn’t so far. We’ve been carrying on business in the U.S. both as an asset manager and as an advisor for many years now. And as you heard on the video there’s nothing, but enthusiasm in terms as prospects there in the United States. So, we haven't seen any evidence for the country at this stage.
Brian Johnson, CLSA. Question for Shemara. Shemara, up until about three days ago, I think we are in a world with bond rights always going down, asset values were always rising, but I was just wondering, can you talk to us just about this inflation versus the ability to list the economic rents on infrastructure assets that Macquarie holds.
Sure. We’ve actually interestingly done a few pieces of work recently for our investors, which we are happy to share with anyone who wants in terms of how infrastructure performs as an asset class in periods of rising interest rates and interest rates being driven by different things when it’s GDP growth, when it’s inflation et cetera. Some people may be surprised to see that in periods like the one we’re in at the moment and Nicholas mentioned this way, the interest rate increases are actually being driven by increasing synchronized global growth. Infrastructure tends to perform more strongly in absolute terms than it does in periods where there is less of that.
You shouldn't actually be surprised because a lot of these assets are inflation hedge. So, the utility assets have their rates set, taking account of what’s going on with inflation, and the patronage assets really benefit as GDP growth increases. So, whilst discount rates may increase, actually the asset cash flows, typically increase faster because if you’ve got your revenue line growing at a higher rate in a business with very high operating margins, your profit line is growing at even a higher percent. So, we find, typically it’s been a good cycle for us. I’m very happy to share all that me or our research team are now doing.
And it’s important to note Shemara that this whole historical [indiscernible] know the future, but there is lot of evidence in terms of how these assets have performed at different period to the cycle.
They have gone back several decades and looked at similar cycles, but as Nicholas says, each one is new.
Richard Wiles, Morgan Stanley. Shemara couple of questions for you please. First of all, I think on one of the slides you, slide 30 you say that around $18 billion of AUM is in Asia, let’s assume that is $18 billion of the roughly $80 billion sits in MIRA, what are your expectations for growth and opportunities in the three regions? Do you think Asia grows more quickly than the U.S. and Europe? And do you think that the Trump administration will accelerate the opportunities in the US?
Look, we think we see a lot of opportunities in all three regions, particularly for the size of manager we are in those regions, we’re a small percent of the flow of investments happening. We are very excited about Asia, so Asia is probably a higher return, but higher risk region to invest in. We’ve been on the ground, they have nearly two decades now. We’ve had, our teams are across Macquarie Group, 98% localized so our South Korean team have been there since the late 90s, all South Korean; the Indian team, all Indian; the Chinese steam, all Chinese. And so, we have done a lot more, I think than any other managers in Asia in identifying investment opportunities, shaping them, de-risking them, building credentials, so that as money starts to flow there we will be very well positioned to stay at the front.
Having said that, Europe is a market where the biggest volume of infrastructure transactions happens today, and I mentioned the barbelling earlier we’re doing a lot of utility investing. So, we had National Grid and the Finnish Elenia asset recently that we bought in our SuperCore fund and then we’re investing in areas like Eastern and Southern Europe more. So, we see a lot of opportunity there. Coming to the U.S. and your question also about Trump. We certainly have - we've just invested our last fund very attractively, bought assets like marked terminals recently in [indiscernible], the list of utility.
Again, we have enough assets to invest, I think the Trump administration is very keen to see greater investment in infrastructure, but as you know the infrastructure assets are all loaned at the state and local municipality level, and that’s where you really need to accelerate growth and I think what the Trump administration is talking about is doing what happened in Australia, which is an incentive program from the Federal level to encourage more state-level investing. I think, he’s talked about 200-bill to encourage 1.5 trillion of assets. I live there, I don't know 2004 when I first got their 14 years ago we spent a lot of time with our colleagues in Macquarie Capital and across the group talking to states and municipalities about trying to unlock the damn of some public-sector investment, and that journey still continues.
I think the availability of muni bonds has made it challenging because the public sector has alternative funding, but the US infrastructure needs a lot of investment as we all know, and I think your statistics was 6 trillion for upgrading US infrastructure. Some day that dam will have to break, but at the moment we have enough to feed us in terms of growth. So, getting answers, we see opportunity, our teams on the ground in all three regions that are enthusiastic in getting their funds invested.
Okay, thank you. Can I also ask about your airports business specifically, you’ve had a lot of success in the past, can you tell us what you’ve done in Asia in the past and where you see Asia as a growth opportunity for your airports business and particularly whether you tapped into growth in airports across China?
Yes, look in China to date we’ve been investing more in things like water treatment and water as we talked about. The airport opportunities haven't come up in scale yet, but they will be huge when they do. We looked at the Japanese airport that was just privatized and there is a second one coming. So, we have done smaller airport investments across Asia, but none of the big ones have come through yet, but as I was mentioning in the case studies about what are the deep operating expertise we’ve got in airports we would really love to bring to operating Asian airports and that’s an opportunity for the future.
Sam, Andrew Lyons from Goldman Sachs. Greg, you noted the imminent release of the federal open banking inquiry. Can you perhaps provide any views on the direction this might take banking in Australia over the next couple of years and what opportunities you see it providing Macquarie over that period?
Well, we're very optimistic, very supportive and very optimistic. We've been monitoring for the last few years the advancing developments seen in Europe and the UK. So, as I said, it will be a slow and steady roll out approach, no doubt. We hear about how complicated that will be and for people. We’ve taken a different approach. We think it actually needn't be that complicated and we’ve invested in the technology to support our customers in being able to use the data in the way that they would like.
So, we’re very positive about the impending release and hopeful that it will speed up broader adoption, but we might be - we are not waiting for that. We're just moving ahead for the benefit of our customers and a whole range of other service providers that want to work with us with their customers, so that’s very encouraging.
Simon Fitzgerald here from Evans & Partners. Another question for you, Greg. A lot of the technology initiatives you've shown here are probably the most visible across the group. So, I’m wondering, do you have any sort of comments in terms of how long you can hold that competitive advantage and maybe any other comment in terms of what’s happening across banking operations across the country as well?
Yes, Look, in some areas, I think, we are well ahead of the industry. It does help where you’re starting from a relative position of not a lot of legacy, that’s not to say we have no legacy, there obviously legacy platforms and so forth, but our scale is much, much smaller. And so, we’ve been able to move much more quickly at adopting some of the new technologies and some of these are really quite new.
And I think, the - kind of the bigger you are, it’s almost the harder it is to make the change, because there is a lot more data and legacy to sort of change. So, building a tech stack from the ground up is not that easy, I think, if you are an incumbent. So, I suspect that and what does that matter? I think, it matters in terms of the quality of the customer experience. You can paper over that and try and make up for things that don't work quite as well in the sort of core systems and the back end and so forth. But it does take a lot of careful design and thinking and tech to deliver that really rich customer experience. We just hope that just works really well.
And it’s - and so I think we are very well placed. Everyone is investing heavily in the same sorts of areas. So, we're not taking the view that we need to be the best at everything or the first at everything. But we think if we’ve got a leading offer that will serve us very, very well in attracting a meaningful portion of customers, and we’re seeing some strong support already.
Thank you. Frank Podrug from Merrill Lynch. Andrew, just going back to energy. Given the shifts in supply demand we are seeing in the U.S., I wanted to get your thoughts on what that means, both domestically and globally? So domestically, both get a kick up in production, Marcellus and bigger shale formation, not much storage build, a lot of the demand coming on Board from LNG exports pipes to Mexico and industrial. So, is that market perhaps structurally set and cyclically set for more volatility and wider spreads in the future?
And secondly, globally, there still persists a pretty wide spread between LNG prices coming out of the U.S. and global LNG process, and I guess, there are good structural reasons for that. Do you think that persists, given all the LNG export full capacity coming on Board and what role can you play in that market?
So, I have a fundamental view that, over time most of the energy markets will head towards global, and there are some that won't be, until power is ultimately each distinct regional market. So, it’s slow, but accelerating as far as I can see, off perhaps a low base at least in the gas side. So, working our way through it. Oil is obviously a pretty global kind of market, coal is a pretty global market.
When you get into gas, it’s not yet, but LNG I do see facilitating that and the U.S. becoming a substantive exporter. I mean, it's already affected the prices in Asia a reasonable amount, even though the actual quantity and that’s coming out at this point in time is not that great, but there’s lot of contracts now in place.
So - and then the other thing I would say is that, everyone is aware of the massive growth in Asia of - for the - for energy and the quantum of energy that’s required. And people are kind of building out in advance for that, if you like. So, I think, there is a lot of investment at the moment that’s sort of going towards bringing more equalization of prices across different regions.
Just trying to chasm on back to your first question about the U.S., I think, it was more regional within the U.S. what happens. It is pretty interesting. We are seeing lots of change, and there are definitely lots of pricing in bounces just within the U.S. regions and it's being driven by both sides of the equation. So, you've really got production situations where - i.e., where your technologies is changing things and ramping up production. And then, frankly, there's just a lag in the infrastructure to deal with that.
One of the things we're concerned about, even on the LNG side is sure, the major pipes are in place, but the actual pipes to get the last mile into the LNG facility, we'll, actually there is a lot of work got to be done there. And then so the supply side, there's lots of change going on and there still situations where you've got pricing differences driven by the lack of infrastructure to be able to move molecules.
And then the second thing is on the demand side, we would be seeing at least once a week a tender for a major industrial kind of facility that is being built in the U.S. in different regions, essentially close to energy sources that we are being asked to tender for. So that’s only just starting, in our opinion, obviously part of the Trump plans. But we do see a lot of domestic investment in industrial consumption going on and that is starting to drive demand imbalance as well across the regions in the US.
Brian Johnson, CLSA. Two sub-questions. One, very quick one. Gary, how do you manage the residual value risk in the auto portfolio? And Tim, at the operational briefing about two years ago, you ran us through the principal investments business and talking about a whole period target and IRR, flip the investments out. If I have a look just at the last result, we’ll probably go back to the full-year result, you had $1.7 billion of allocated equity. That figure had drifted up to $2.3 billion. I assume that's Green Investment Bank. We see it in the briefing here today, and we see specific mention of PEXA and Nuix and Quadrant. Could you just update us on basically the overall metrics that you are trying to achieve in that whole - in the whole period?
Sure. Will I go first, Tim?
Yes. Go, go.
Well, in our motor vehicle books, we don't take residual value, Brian, in Australia or the UK, or the US. There might be something down the track we do look at, I was talking about the usage model. And if Macquarie is - the personal ANZ asset with equipment supplies, et cetera, we will have to get our mind around that in the future ultimately, but we can bring people and we will take residual value. But in our books at the moment, it’s a money-on-money transaction. We don't take that residual value risk, we're just purely after credit risk. So hopefully, that answers your question there.
Yes. Thanks, Brian. I think, firstly, in relation to the step up in the numeric capital that we have in the principal book, firstly, it is a point in time. Obviously, something that's fairly an average over a year. But increasingly, where we're investing is in the green energy space, so a lot of that increase is coming about as a result of increased level of activity in green energy.
And so hopefully, for - a lot of what we are doing was in that early stage or is in development and construction phase. And therefore, I think the returns in that phase albeit with increased risk are very attractive, but the target there is to transition those assets into a position where they de-risk and they are operation and therefore ultimately get transferred to the more natural long-term owners. And there are, sort of points on that journey, we were faced with a choice or a decision to make as to whether or not, then or now is the appropriate time to divest.
So, we are comfortable with the return metrics. I think for that, that activity and I think as I said that’s really been the driver of the increase. In terms of specific assets, I want to comment necessarily on them individually, but generally the book is in good shape. Obviously, ultimately you want to realize profit from these investments, and I like to comment on our intentions going forward, but I'm happy to talk about the past and we haven’t sold any shares in those three companies that you mentioned. They’re appropriate to deliver an appropriate return on equity for the shareholders depending upon their risk profile, and obviously it’s different when you’re ranging from common equity through to MIS or [indiscernible] investments.
Alright. In the interest of time, we’ll take one more question.
Hi, it’s Anthony Hoo here at Deutsche Bank. Question around green energy or investing in green energy, I mean it’s an area that can see social and political issues being involved. So, question is, how does that influence the level of returns, does it impose or any constraints or conversely does actually boost returns given the influence of government policy?
I mean probably it’s just one of the risk factors we take into account. So, obviously there are regimes that support renewable energy all around the world, and we look at the sustainability of that regime as just one of the risk factors I think perhaps you want to add.
I think it’s the same point. I think that when you think about in the case of Macquarie Capital it’s growth in Asia, a lot of that is driven by the regulatory regime to the government regimes that exist in particularly in Japan, and Korea, and Taiwan as well. Albeit, increasingly the world is moving towards a market where the subsidy from the government are less relevant. So, our challenge is making sure we're getting ahead of that.
Okay. Well, I would like to thank you all for coming. We do have some refreshments outside if you want to stay. Thanks again.