Friday Letter: Rattled

It’s already the stuff of City legend: some ten years ago, Guy Hands came from nowhere and rocked the boat by using securitisation as a funding instrument in leveraged acquisitions.  

To describe the former bond trader’s impact on the London deal market as devastating would be to overstate it, but it’s fair to say that securitisation à la Hands applied to LBOs proved an immensely powerful weapon and for a period gave its inventor a big advantage over his rivals.

Today, another newcomer with a clever trick up its sleeve appears to be giving Europe’s buyout establishment an unexpected run for their money.

Following a number of eye-catching moves, Macquarie Bank has risen to prominence in the Square Mile and beyond in ways that make Australia’s largest investment bank difficult to ignore.

In late June, the bank’s listed private equity affiliate Macquarie Capital Alliance Group, which raised A$1 billion (€620 million; $770 million) in an IPO on the Australian Stock Exchange earlier this year, outbid several mid-market private equity groups to purchase the digital media services arm of the BBC in a £166 million (€249 million; $304 million) acquisition.

Prior to that, in May, MCAG had put itself on the map by leading the much larger €1.85 billion sponsor-to-sponsor purchase of directories publisher Yellow Brick Road, leaving leading LBO players such as Blackstone and BC Partners in its wake. MCAG’s parent co-invested in both transactions.

Since then, Macquarie has continued to make waves. In August came news of a mooted bid for the London Stock Exchange. More importantly still, such is the group’s appetite for deals that according to leveraged finance professionals, there aren’t that many auctions in the €1 billion plus market segment currently in progress in which the bank hasn’t taken an interest in the outcome.

MCAG, Macquarie’s listed private equity outfit, has a mandate to invest globally and in any industry sector except property. What makes it stand out is its ability to effectively sell its purchases on to institutions as well as retail investors in the Australian equity market. As a result, the group has access to cheaper capital and a lower return requirement than its mainstream private equity rivals.

Unsurprisingly, say market sources, the conventional LBO dealmakers who have grown so accustomed to dominating the scene are feeling a bit rattled. Given the cost of an unsuccessful bid for a competitively shopped investment target, they are in effect forced to consider an early retreat every time one of Macquarie’s affiliates shows up in a data room – possibly long before there is clarity on whether the Aussies are really all that serious about the deal or not.

At a time when competition for assets in the LBO space is already white hot and renewed interest from trade buyers stoking the fires furthers, the advent of a new financial investor armed with cheap capital hasn’t made life for general partner groups any easier.

At least with Hands a decade ago, you could deal with the threat by doing your homework on securitisation in order to copy his technique. With Macquarie, replication isn’t really an option. For as long as Australian demand for leveraged overseas assets remains strong, expect the bank to continue to have an effect on the auction dynamic in European buyouts going forward. Luckily for GPs, this is unlikely to last forever. But for the time being, Macquarie looks a force to be reckoned with.