We make sure that we focus very clearly on the worst possible case outcome; make sure we can afford it as an organisation from an earnings viewpoint rather than from a simple capital viewpoint. Then from an organisational perspective, we aggregate that risk across the organisation and make sure the organisation can afford something going wrong across a whole range of different businesses.
Knowledge@Australian School of Business: Do those calculations change with time? After all, we’re talking about the risk you’re willing to bear and also the profit that you would like to get. Has that changed as we have been going through quite turbulent economic times recently?
Nicholas Moore: Absolutely. It changes. It doesn’t change in terms of the amount of loss that we’re prepared to take because that’s tied to the amount of earnings that we think we’re making as an organisation. From an organisational viewpoint, we always need to be profitable so when we are taking a risk in terms of a business, we’re mindful that if it goes wrong we still need to be profitable. There still needs to be sufficient income being made across the group.
In terms of how it changes over time … the events that could give rise to the loss will change, but if we think something is going to give rise to a greater loss then we’ll take less exposure to it – that is, unless we’re seeing it corresponding with a higher return coming from the transaction.
One of the interesting things with the risk-return equation is that, prior to the financial crisis, we weren’t seen as a lender in the marketplace because the spreads on credit were basically fairly low, below what we thought was a fair return on capital. With the benefit of hindsight, we were obviously right about that. Now, the world has changed and we’re getting good return on credit so we might be taking more exposure to credit than we were before the crisis, but we actually see a much more healthy return coming from that after the crisis. The amount of risk we take won’t necessarily just be about shrinking the exposure, but about the return we’re getting for taking that risk and whether can we afford to take it.
Knowledge@Australian School of Business: And are you willing to vary the level of risk you will take for different types of investments?
Nicholas Moore: The amount of exposure we will take will depend upon our perception of the future variability of the income. With something like infrastructure, we always were attracted to that as an asset category because the income was relatively certain and that was always an attractive character.
It is a GDP-plus style of income stream without a lot of volatility. It suits Macquarie’s banking mindset.
However, if you’re looking at early stage start-up “greenfield” activities which, in various areas, have a lot more risk and entrepreneurial flavour to them, we’re not all that suited (to such activities) across the whole organisation. Some parts – a relatively small part actually – of the organisation have been very successful in that area. Things like infrastructure are more suited to the underlying banking mentality. That said, an area that we’ve been very successful with is resources and commodities. We’ve been able to build up a very longstanding track record and experience of almost 40 years in that area. Our teams have been able to really understand the physical and financial drivers of resource projects and they have been able to step up to lend and provide capital to a whole range of resource projects.
