Macquarie: The Prosperous Ascent of the Millionaires’ Factory

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For a century and a half, Hill Samuel was a renowned name in British merchant banking. It was famous for its role in founding Shell, the oil company. However, by 1995, Hill Samuel had dwindled to insignificance, absorbed by Lloyds Bank and outperformed in its core business by the dominant American financial institutions of today. This same fate befell numerous other banks, with those that made the most effort to compete on Wall Street, such as Deutsche Bank, Nomura, and Credit Suisse, suffering the greatest losses.

Given this context, it is not only intriguing but also a valuable management case study to examine one small merchant bank from that era which emerged from a peripheral market and evolved into a global giant, with a highly profitable presence in the United States. This merchant bank is known as Hill Samuel Australia, which changed its name to Macquarie upon gaining independence in 1985. While financial insiders are familiar with Macquarie, it is now gaining recognition among the British public as a major player in troubled infrastructure businesses.

According to Joyce Moullakis and Chris Wright, seasoned journalists who closely followed the company, the name change was meant to reflect their aspiration for pioneering work and a prudent approach. They drew inspiration from Lachlan Macquarie, the fifth governor of New South Wales, who introduced the colony’s first currency and left a legacy of reforms when he retired to Scotland.

Moullakis and Wright’s book, The Millionaires’ Factory, presents an anecdotal account based on extensive access to former Macquarie bankers from older generations. It chronicles Macquarie’s rise from a small team of Harvard Business School graduates handling advisory mandates in Sydney to becoming the pioneer of infrastructure as a distinct asset class for long-term investors, as well as one of the world’s largest financial traders in commodities.

Central management was there to support and monitor, while enforcing strict risk controls to make sure nobody blew up the bank

So why did Macquarie succeed while many others faltered? The authors argue that Macquarie’s culture was more crucial than any specific deal, strategy, or innovation. They highlight several unique aspects that trace back to the bank’s early days. The founders of Hill Samuel Australia, David Clarke and Mark Johnson, believed in giving employees as much freedom as possible while maintaining safety and controls.

Throughout its history, Macquarie has had little top-down strategy or capital allocation. Instead, the company empowers entrepreneurial individuals to explore new business lines, ranging from 24-hour foreign exchange dealing in Sydney to gold bullion arbitrage with London, cash management trusts, cross-border leasing, and later ventures in infrastructure and commodities.

Macquarie thrives on exploring “adjacencies.” For instance, if it succeeds in gold bullion, it ventures into other metals. After pioneering infrastructure finance in Australia, it replicates the model internationally, making small bets that have the potential to grow into large businesses. Failed ventures are swiftly shut down, while successful ones are allocated capital to expand, resulting in substantial wealth for the individuals behind them. Central management provides support and monitoring, ensuring strict risk controls are enforced, as established in the bank’s early culture.

When described this way, Macquarie does not possess an air of magic. However, it is a rarity to find a management that genuinely supports its staff. Macquarie’s approach also diverges from European banks’ strategies on Wall Street. There were no transformative acquisitions, mass hirings from larger companies, attempts to gain market share through a large balance sheet, or promises to offer a full range of services. These approaches often led to inflated cost structures and imprudent risk-taking.

While Macquarie’s most renowned business line is infrastructure, it currently accounts for a small portion of the bank’s revenues. The authors explain how it all began with Macquarie’s advisory role in a public-private partnership for Sydney’s M2 motorway. Through this project, Macquarie realized the appeal of long-term cash flows from toll roads for investors like pension funds. They also recognized the value of equity in such projects, in addition to debt. Finally, they discovered that acting as a developer, rather than just a financier, presented the most lucrative opportunities.

From there, the infamous infrastructure finance model emerged, involving the structuring, trancheing, selling, reselling, packaging, and refinancing of cash flows from such projects. However, these practices sometimes disadvantaged users. During its ownership of the UK’s Thames Water from 2006 to 2017, Macquarie oversaw a significant increase in debt while generating double-digit annual returns on investment. However, the utility is now on the verge of collapse due to recent interest rate hikes. Moullakis and Wright provide clear explanations of how much infrastructure activity relies on tax incentives, allowing Macquarie to profit from fees at every stage.

Unsurprisingly, The Millionaires’ Factory delves into past controversies, which can slow down the pace of the book. It is also lacking in the kind of scandalous banking stories that might appeal to a broader audience. While numerous Macquarie executives are mentioned, not all of them come to life on the pages. Nevertheless, for readers seeking insights into a fascinating financial institution and how it succeeds where many competitors fail, The Millionaires’ Factory comes highly recommended.

The Millionaires’ Factory: The Inside Story of How Macquarie Bank Became a Global Giant by Joyce Moullakis and Chris Wright, published by Allen & Unwin, offers an extensive 432-page exploration of the subject.

Robin Harding serves as the FT’s Asia editor.

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