Knowledge@Australian School of Business: How do you invest on a resources project? It may be a very long-term investment and, with calculations of risk, 30 or 40 years on we may be in a very different world.
Nicholas Moore: It’s more likely that infrastructure will be long-dated, particularly where projects will take years to build – and then you’re expecting the pay-off to take place, as you say, over 30 or 40 years. The resource projects that we’re looking at financing usually have a shorter (timeframe). They’re not immediate. It will still take 18 months or so, in terms of developing a small goldmine or a small metal mine. Even with oil and gas, there will be a short timeframe so you do need to make that trade-off in terms of developing the information you have about the underlying mining project, about the underlying resource. As you develop your information you’re providing more capital. Then you reach the point of determining: “How much money do we need to bring this stage to development? What do we think the underlying reserve is worth? Can we effectively pre-sell it through hedging, and does that give us the confidence to advance capital to the underlying project?”
Knowledge@Australian School of Business: Is there a risk in giving individuals too much freedom to make those risk calculations?
Nicholas Moore: How the individual sits within Macquarie is at the heart of our culture. It sounds like a slightly contradictory view of the world, but we see it very much as a bottom-up driven organisation now with a very tight risk framework.
So, firstly we give people an amount of risk that they are able to take within the overall framework and secondly, they are very much accountable for the outcomes.
Knowledge@Australian School of Business: So the individuals ought to be concentrating on the core, doing one of those fundamental risk-return calculations and everything else is the extra risk that they’re willing to take?
Nicholas Moore: They have to take responsibility for the outcome. An example is when people want to set up an international office, one of the issues we look at is global risk. There’s a process that goes on – particularly with the low balance sheet areas where someone wants to go in and set up an advisory business or a funds management business, for instance. Basically we support them to pay their costs in terms of their own salary and wages and the office – and the costs in terms of what they need to spend to engage (in that location).
Knowledge@Australian School of Business: One of the problems we saw really from 2007 onwards, at the height of the global financial crisis, is that banks lost their funding. They weren’t bringing in enough cash to spend on investments. How do you deal with that sort of risk?
Nicholas Moore: That’s a very important risk from a financier’s viewpoint. It comes from the underlying mismatch that many banks and financial companies over the years have engaged in, where they effectively borrow short and then lend long. It’s a mobilisation of deposits and it’s what’s meant to happen in the financial system. Unfortunately, lending long predicates the ability to continue to access the short-term market. From a Macquarie Group viewpoint, we never actually adopted that mentality of borrowing short and lending long. We’ve always matched the books so it means that when we put on a term asset, we’ll only put it on to the extent that we have term funding. If we don’t have term funding we won’t put a term asset on board.
