Pitcher Partners Investment Services (Brisbane) | The information in this article is current as at 07 July 2023
Author: Alistair Francis, Director – Investment Research
With the recent loss of two key utility stocks on the ASX (Spark Infrastructure in December 2021 & AusNet Services in February 2022), direct Australian equity investors have less choice in gaining exposure to the growing opportunity created by the energy transition thematic.
The more obvious choices left in the large cap space of the market would be Worley Group (WOR), Fortescue Metals (FMG), AGL and Origin (ORG). Unfortunately, ORG is under takeover and subject to the customary conditions including the key ACCC review, is also likely to exit the local bourse.
A stock that many perhaps wouldn’t readily identify as being exposed to this thematic is Macquarie Group (MQG), albeit currently in a very modest way but will likely grow substantially into the future. As many would appreciate, MQG has been an amazing ASX success story, having started out with only three employees as an Australian subsidiary of a British merchant bank – Hill Samuel & Co Limited back in late 1969, which cleverly turned a profit in its first 12 months. The very successful entrepreneurial spirit was born and remains today as a uniquely structured global financial services group. Currently MQG employs over 20,000 staff in 33 countries whose business mix has evolved over time as the opportunities grew. Its business activities today are made up of four principal operating groups which includes two annuity-style businesses, Macquarie Asset Management (MAM) and Banking and Financial Services (BFS), while its two markets facing divisions are Commodities and Global Markets (CGM) and Macquarie Capital (MacCap).
In 2012 the UK Green Investment Bank plc (GIB) was launched by the UK Government. It was the first institution of its type in the world, publicly funded and designed to mobilise private finance into the green energy sector. Between 2012 and 2017, GIB helped to finance more than £12bn of UK green infrastructure projects.
Astutely in 2017, Macquarie Group acquired GIB from the UK Government for £2.3 billion ($4.2 billion). This helped to create one of the world’s largest teams of specialist green infrastructure developers and investors. The team began operating as the Green Investment Group (GIG) thereby enabling a multi-faceted service offering to a global market.
On 1 April 2022, GIG was transferred across to MAM. It was a logical move as the business morphed from a market facing transactional offering into an annuity styled business. Whereas previously GIG developed and sold valuable assets, thus providing a useful one-off gain-on-sale, the asset was now being retained and housed in a MAM-structured fund where MQG benefits from the annuity stream revenue model primarily based on Funds Under Management (FUM). This strategy also has the benefit of being an asset management model that is ‘capital lite’ i.e. utilising external parties’ capital as opposed to the previous structure that leveraged off MQG’s own balance sheet.
MAM has grown substantially over time, both in public and private markets. As part of the world’s largest infrastructure asset management group, GIG sits neatly between a global market looking for increasing amounts of energy transition solutions, and investors who provide that valuable source of capital.
MQG has energy transition capabilities throughout the diverse organisation which is unique within global private market peers, given its ability to offer wholistic or turnkey energy transition solutions:
(1) Finance & Development – MacCap/GIG can finance, develop or build renewable assets around the world created by its relationships with governments, suppliers and consumers, as well as access to capital – both from its own balance sheet or external partners
(2) Advise – MacCap can structure equity, debt and Power Purchase Agreements (PPAs) for customers and utilities
(3) Manage – Macquarie Investments Real Assets(MIRA), as part of MAM can fund, manage and operate energy transition assets
(4) Research – provides specialist ESG and clean energy research
(5) Trade – CGM can provide physical inventory management and derivative hedging along with trade emission allowances and carbon offsets.
A key contributor to MQG profit growth over time has been the MAM division. The markets facing CGM division had an exceptional FY23 on the back of energy markets volatility.
MQG Divisional Profit Contribution
The market is awash with forecasts of the spend required to achieve the massive global energy transition which, due to on-going supply chain tensions and skilled labour shortages, will likely see the costs grow.
One source of insights which many in the markets would likely recognise as credible, is the recent comments made by Mark Dooley – Head of MQG’s GIG, at a sell-side investor briefing. When prompted, Mark suggested that the recent updates from the United Nations Intergovernmental Panel on Climate Change (IPCC) indicated that the best guesstimates are that there will be $4.0trn p.a. global spend for rest of this decade, $5.6trn p.a. in the 2030s and $7.0trn p.a in the 2040s. It’s likely that 50% of those targets will be investment/spending on the energy grid.
For MQG, the investment opportunity is potentially approximately $800bn to $1.0trn of annual flow of need and/or opportunity. For GIG, as part of the greater MAM division, one of the limiting features will likely be the amount of capital it can amass to allocate to these projects. No doubt this enormous global opportunity will be a key contributor to the growth of MAM (and other divisions) for many years ahead.
Many MQG watchers would likely recognise that a large contributing feature of its historical success has been its ability to transform itself as global markets evolved with the right balance of entrepreneurial staff and allocated capital, all sitting within a sophisticated risk management framework. The global energy transition is a massive task which MQG, given its experience, is uniquely positioned to support and benefit from, across several of its diverse service offerings.