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Lachlan Colquhoun

Allan Moss has overseen investment bank's meteoric rise through an innovative philosophy and investment strategy

ALLAN MOSS, the chief executive of Australia's Macquarie Bank, uses a Chinese proverb to describe the approach which has transformed his company from an outpost of a British investment bank to a global player inside 20 years.

'I think there's a Chinese saying that you cross the stream by feeling the stones with your feet,' says Mr Moss.

'It's been a step-by-step process. We haven't tried to construct grand, long-term visions, we've just been trying to do what we do well and add value by taking the incremental steps.'

Most recently, those incremental steps have been made in Asia.

Last year's purchase of ING's cash equities business has added another 450 to Macquarie's head-count, with the result that the bank now sources about a third of its income from the region.

A stockbroking licence has been acquired in Malaysia, the business is starting up in India and a new joint venture has been announced for Thailand.

'ING has been a fantastic acquisition for us and we've been absolutely delighted with it,' says Mr Moss.

'It extends our broking services very significantly so we are now able to offer services in Asian stocks in the Asian time zone from Japan all the way down to Australia and New Zealand. It's hugely exciting.'

Beyond equities, the ING acquisition has also coincided with a flurry of activity in Macquarie's specialty, the packaging of infrastructure assets into separate listed or unlisted funds. The bank has listed a US$1 billion infrastructure fund in Singapore, snapped up retail malls in China and started talking about a Chinese media fund.

Up until now, only 4 per cent of the bank's specialist funds have been Asian-based, but Moss predicts this is about to change rapidly.

'There has been a shortage of assets available in Asia but that is changing as governments increasingly move to privatise,' he says.

'The other reason is that until recently there hasn't been an appropriate regulatory environment for securitising assets, and now regulations are being introduced to facilitate that, so those impediments are being addressed rapidly.

'The opportunities for securitised real estate and infrastructure in Asia are absolutely huge.'

The renewed Asian focus crowns a remarkable 20-year journey for Macquarie, which was formed in 1985 from the Australian branch of British merchant bank Hill Samuel and then floated in 1996 as Australia's first listed investment bank. Today, the bank has outgrown its Australian origins and now sources about  40 per cent of its annual A$3.6 billion ($21.4 billion) in revenues from offshore.

Moreover, the innovative 'Macquarie Model' of taking real estate and infrastructure assets and packaging them into funds has been successful around the world in assets from Korean toll roads to Kenyan airports and US golf developments, and is now being widely emulated. At each step of the way, Macquarie collects fees from its new vehicles, charging annual management fees and performance fees as well as underwriting fees when they list.

'We have a philosophy of indifference to the business cycle,' says Mr Moss.

'A traditional concept of business strategy is to ask what business you are in, and then develop our strategy around that but we've felt that is a sterile approach because you tend to define your own strategy in terms of your competitors' business models and that leads to conventional answers.'

While the parent bank itself is worth about  A$14 billion, the funds that it has created now comprise assets worth A$46 billion, a figure UBS Warburg expects to grow to A$69 billion by 2007. Macquarie has even signalled an intention to bid for the London Stock Exchange.

Throughout the bank's short history, Mr Moss has been a constant. He joined Hill Samuel in 1977, when it was a Sydney operation with a 50 person headcount and  a core business of managing wholesale cash.

Now 55, Mr Moss has been Macquarie's chief executive since 1992, but rather than expounding at length on his leadership style, he  is happier to point to the factors which have driven Macquarie's success, a strategy he says is based around two concepts - 'adjacency and competency'.

'The adjacency is best illustrated by how we got involved in the infrastructure funds management business a decade ago,' says Mr Moss.

'We decided to compete for the private financing of a toll road in northwest Sydney and came up with a novel idea of financing it through an IPO, and to our knowledge no one had done that before with a new road.

'From there, it was a relatively modest step to establish a fund that might own more than one road, or to do the same in other industries, and to broaden the mandate to international roads.

'So it's been innovation by increments.'

The concept of competency comes in when Macquarie enters new industries in which to apply its model. As it prepares to enter a new field, it hires experts to advise and form teams with the Macquarie staff who apply the financial expertise to create the new specialist fund.

In selecting the assets, Mr Moss says Macquarie is driven by a criteria he calls 'privilege,' which delivers safe cash flows and minimises risk.

'Normally there is only one major toll road from point A to B,' he says.

'Airports also fit into that category because there's normally only one major airport in each substantial geographic location and there are probably only one or two broadcast towers in any region.'

Risk management is his  specialty and in this role, many observers say he plays the brake to the accelerator role played by Nicholas Moore, the deal-making head of Macquarie's Investment Banking Group and the man widely considered as most likely to head the bank after him.

'Organisationally, in many respects ours is a federation of businesses, so I give very few black and white directions,' says Mr Moss.

'It's a collaborative process and when we think of our culture, the best way to explain it is that it's a small business culture within a larger organisation and those of us who are in the leadership all remember what it was like to be a part of a smaller business, and so we've organised ourselves to maintain that smaller business entrepreneurial culture within a much larger organisation.

'The way we foster that is through a philosophy we call freedom within boundaries and what that means is that we seek to centrally control a small number of key risks but we leave as much as we possibly can to the people who are involved in the relevant business, and that even extends to looking to them to recommend their own strategies.'

One result from the Macquarie culture has been the high salaries and bonuses which have resulted in Macquarie being commonly referred to as the 'Millionaire Factory.'

Mr Moss himself received cash and options worth A$18.6 million last year, making him Australia's best paid chief executive while Macquarie's top seven executives shared A$89.3 million. This also trickled down to the lower echelons, with the average wage of all the staff more than A$185,000 a year.

Mr Moss routinely defends these salaries, arguing that the compensation is performance driven, and that such salaries are needed to retain top people.

'We have very low turnover,' he says.

'For the top 20 per cent of staff, voluntary turnover is down to around 6 per cent which is very low and almost at normal retirement levels and we almost never lose business heads to a competitor.'

In addition to adding a head-count of 450 from the ING acquisition, Macquarie has also been actively recruiting in Asia, hiring nationals in the countries where it operates.

But these additions, says Mr Moss, are not changing the Macquarie culture. Rather, the new hires are adapting to Maccquarie.

'When I visit our international offices, even though they are speaking a non-English language on many occasions in every cultural respect it feels to me just like the organisation I joined 28 years ago,' he says.

'People understand how we do things - they understand the concept of freedom within boundaries and they enjoy operating entrepreneurially but within a sound risk management framework.

'It's still Macquarie and it's Macquarie because the philosophy we have in our business is a compelling one and a manifestly successful one so people feel happy to embrace it.'

Biography

Allan Moss was born in 1949 and educated at the University of Sydney and at Harvard Business School, where he gained an MBA.

He came to Macquarie Bank in 1985, when he led its application for an Australian banking licence. He was appointed its deputy managing director in 1989, before rising to the rank of chief executive and managing director in 1993. He previously worked at the Australian arm of merchant bank Hill Samuel.

Mr Moss was appointed an Officer in the General Division of the Order of Australia  this year.

He is married to Irene Moss,  who  is a member of the Human Rights and Equal Opportunity Commission and a state of New South Wales ombudsman.



Architect who shaped the Macquarie Model