It is a queasy sort of a day when Asiamoney meets Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, at Washington DC’s Four Seasons Hotel in September, and not just because of the jetlag and the changeable weather. We meet during a period of miserable uncertainty in world markets: the eurozone in crisis, the US staring at a double-dip recession, and markets looking hopefully to the IMF/World Bank annual meeting to provide some direction, which they utterly fail to do.

For Zeti, the mood is not as bad as it is for some others: Malaysia is basically doing fine, and while it will clearly slow as a result of global problems, it would be a surprise if its growth rates dipped below 4% at any point in the next 12 months. But what’s striking about this meeting is that the normally reticent and softly-spoken Zeti has some unusually strong opinions about problems in the west – and how to fix them.

That’s because, having worked through the Asian financial crisis – she was rising through the Bank Negara ranks at the time and became governor in its aftermath, in May 2000 – she believes there are clear lessons about the process of recovery that the west has not yet shown much sign of taking on board.

“While we need to deal with the financial sector and bring about regulatory reform, it has to be accompanied by pro-growth policies,” Zeti says. “That is what we did in the Asian crisis. We had to do the financial and debt restructuring, but for a chance for those policies to be successful we needed to have growth.” She’s quite specific about what she means – which also stands out, in a week dominated by broad and grand statements and an absolute minimum of practical detail: she  highlights policies to support SMEs, households, access to finance, credit enhancements, infrastructure development and private sector incentives. “We had a V shaped recovery,” she says. “Many parts of the developed world, and the IMF, said we would have a lost decade. We didn’t.”

The west, she says, just hasn’t been doing what it needs to. “Only now are we seeing some of these measures being implemented in the US,” she says. “They needed to have been implemented three years ago.” She also calls for policy that is “more anticipatory rather than reactive. When we were managing the crisis in Asia we looked at what was the worst yet to come and what did we need to do to deal with it, rather than just implementing policies to prevent a collapse and thinking that was it.”

Malaysia is not a member of the innumerable groupings and federations in world finance – the G7, the G20, the G24 – instead making its presence felt more in Asean and in Islamic finance initiatives around the world. Lacking a voice on the world stage, it is perhaps not surprising that she is not a fan of the IMF, nor of representation of emerging economies within it. “The IMF has to become neutral,” she says. “This neutrality and credibility would be enhanced if there was greater representation of emerging markets in the role of the IMF and in its governance process. Crises don’t just happen in emerging markets; this is something the IMF didn’t highlight to the world until quite late.” She says while the IMF has sought to increase that representation, it has done so “in a very incremental manner.”

She goes further and doubts the leadership the IMF has shown; Asiamoney’s interview takes place directly before the formal start of the meetings, but it’s unlikely her opinion was changed by any of the statements of the following days. “The IMF doesn’t seem to have a significant role in this,” she says. “We have looked for the IMF to have a greater role in recognizing what the issues are in their surveillance, and we look for it to provide solutions to many of these problems. Their solutions have not been forthcoming.”

So how does all this affect Malaysia and Asean? “In emerging markets we are doing better [than in the west] but we are going to see moderation in our growth as well, because we are very much part of the global economy and most of us are highly open. But we are still going to see growth, and are still on a growth path.”

Across Asia, central bank governors are having to deal with shifting priorities. For much of the last year, most of them have had to fight off inflation, and have correspondingly been rising interest rates through the year. There are markets where inflation remains a challenge – Vietnam, India, China – but across most of Southeast Asia it’s all but stopped being an issue.

Take the Bank of Thailand, which has raised rates on seven separate occasions since December, reaching 3.5%. “I think we were on the right direction so far, but if you ask the question from now on, we do think the slowdown in the world economy will mollify somewhat the inflation pressure,” says Prasarn Traitvorakul, Governor. “The job is to take a proper balance, but the balance lately has tilted towards the risk of growth becoming more apparent than inflation pressure.” When the bank next meets to discuss rates, on October 19, it would now be a major surprise to see another hike.

In places like Thailand, where domestic consumption is strong and the outlook good, the global problems have arguably been helpful. “We hope that some slowdown in the world economy will lower the pressure from the supply side,” says Prasarn. (A wild card, though, is a new government policy offering to buy local rice at heavily subsidized rates; HSBC has warned that, with Thailand being the world’s biggest rice producer, this could put inflation back on the agenda in rice-importing countries.) Like many Asian nations, Thailand has sought to boost intra-regional trade’s proportion of the overall national trade balance sheet, reducing reliance on the west, and this should prove helpful. “The feeling is not too pessimistic or optimistic,” he says. “There are threats from what’s happening in the euro zone and the US, but there are also encouraging factors like regional integration in trade and financial flows.”

Zeti, in Malaysia, has been viewing the world with similar interest. From late 2010 Bank Negara raised rates four times in seven months, from 2% to 3%, and then stopped in July, “given the increased uncertainties and the significantly heightened risks to growth,” says Zeti. From her perspective, in a country with palm oil and rubber at the heart of the national economy, commodities were the most important thing to watch. “As commodity prices stabilized, which was a major factor from the supply side producing higher inflation, demand has slowed globally,” she says. “This will limit inflation, so most central banks have paused their increases in interest rates.” Official estimates of full-year growth in Malaysia are 5-6%, but it dropped to just 4% year on year in the second quarter of 2011.

Zeti says that for central bank governors in Asia, “the biggest challenge is to have price stability in an environment of sustainable growth. You have rising prices, and at the same time you also have risks to growth, and those risks have become higher because of what is happening around the world.”

One area Asia cannot escape is capital flows. In recent years foreign money has flooded into Asia, particularly Asian bonds, in search of yield backed by strong fiscal stories. But as always, when markets get really bad, capital instead is withdrawn from these supposedly riskier asset classes, despite the fact that the risks appear far bigger in the developed world. In some cases, this isn’t a judgment on risk at all, but a need to liquidate capital in order to pay down other exposures.

Indonesia is the market that has most to lose in this respect; by the end of August foreign ownership of rupiah-denominated government bonds stood at over 35%. That money has been chasing the Indonesia story: a transformed fiscal position over the course of the last decade, a growth model predicated on commodities and domestic consumption, and an apparently successful and stable democracy. But for some time, investors both local and foreign have worried: what if it all leaves again?

Rahmat Waluyanto, in the debt management office of the Ministry of Finance, says that a modest reversal has started to happen. In the space of a week in September, foreign ownership dropped from 35.4% to 33.6%. But he is at pains to point out that foreign ownership in the government bond market is still heavily net positive, at around US$5.5 billion year to date. The withdrawal, he says, “has nothing to do with domestic economic fundamentals but FX movements due to jitters caused by the worsening euro debt crisis.” Not all fixed income is fully hedged in terms of FX exposure, hence the withdrawal, he says, although in fact non-deliverable forwards on the rupiah have been moving up, not down. “There’s no reversal yet; the real money accounts still stay,” Waluyanto says. “Indonesia has the capacity to withstand,” he adds, citing relatively large foreign exchange reserves (which crossed US$100 billion for the first time earlier this year), a widening domestic investor base (including retail investors, pension funds and insurers), and a bond stabilization framework.

Indonesia has mentioned this framework before, but it’s not always been clear what’s involved. Waluyanto says there are four strategies to negate a negative impact of a sudden reversal: the debt management office will use funds from the annual budget to buy back government securities; state-owned companies will buy in; so will be Treasury Unit and Government Investment Unit of the finance ministry; and if necessary, parliament can approve the use of accumulated cash surpluses to buy government securities.

Zeti, too, notes a change in the threat of capital flows. “We are seeing very significant surges in capital outflows and reversals,” she says. “Previously it destabilized us quite significantly. But in the current environment we are seeing these flows are better intermediated by emerging economies.” In 2009, she says, Malaysia’s reserves declined by $25 to $30 billion, with a major depreciation in the currency. “But we could take it in our stride.” She says that, in contrast to the Asian financial crisis, Malaysia has more resilient financial institutions, more developed financial markets, higher reserve levels, a more flexible exchange rate, and more instruments to sterilize inflows than before. Today, around 20% of Malaysian government bonds are foreign-held.

Whatever else happens, southeast Asia is surely the only part of the world where you can still find people barracking for sovereign upgrades at a time when the rest of the world is falling apart. In the Philippines and Indonesia, expectations are high of improved ratings from international rating agencies. Both countries can provide long lists of improvements, from budget deficits to domestic market depth and government responsibility. With Turkey having been upgraded in early September, its Asean peers are not about to stop waving the flag now. Indonesia, Waluyanto points out, has credit default swaps trading considerably tighter than Turkey’s; proof, he says, that if the story is bright there, then it’s brighter still in Indonesia. “So Indonesia should now be in the investment grade category,” he says. It’s good that somewhere in an uncertain world, there are people looking up and not down.

Emerging Markets, September 2011

China’s sovereign wealth fund will not invest in new eurozone bonds, but expects to find other investment opportunities amid the chaos in Europe.

Gao Xiqing, Vice-Chairman and President of the China Investment Corporation, said the fund would not follow the lead of the Chinese sovereign in investing in securities issued to support troubled Eurozone states, such as the European Financial Stability Facility (EFSF). “You heard from our Premier, we like to support Europe,” he said. “But as a corporation our mandate from the government is to maintain a certain amount of profitability given the risk adjustment rules. We can’t just go there and try to save someone. We have to save ourselves.”

He told Emerging Markets: “We have our own requirements, our own mandate and asset allocations, so we have to act on that principle alone.”

But asked if he thought investment opportunities would arise for CIC as a consequence of European turmoil, he said: “That’s true. There will always be opportunities wherever there are problems, that I know. But at a macro level you have to be very careful.” CIC, which had US$374.3 billion under management at the end of 2010, was previously burned by $10 billion of ill-timed investments in Morgan Stanley and Blackstone ahead of the 2008 financial crisis.

In comments to a packed session on the eurozone in the IMF’s headquarters, Gao had some sharp comments about the problems that have led to the crisis. “Culturally you need to change your way of living, your way of spending,” he said. “Lots of people blame the Chinese for saving too much money and not spending; that made it possible for European and American friends to borrow. You should probably reinvent the system.”

He also said that Europe’s diversity was part of the problem. “A lot of people still doubt whether Europeans can get together and have fiscal union. All the people down in the south are trying to work five hours a day and three days a week, in the north eight hours a [day]. The Chinese work 100 hours a week.”

And he blamed ease of credit for exacerbating problems in the western system. “In this country and Europe, people are able to borrow money beyond their means,” he said. “You cannot live off tomorrow’s money, or someone else’s money – but today you are, because of all the geniuses employed by investment bankers. Now the pendulum is swinging. You need to get onto these things: they are innate in your system and you have to rethink.”

He was also bearish on Europe’s ability to fix its problems. Responding to another panelist’s comment that disintegration of the eurozone was unlikely, he said: “The fact that it’s going to be really bad, like the end of the world, doesn’t mean it isn’t going to happen. There is so much procrastination and inaction.” He said that there was ample liquidity available to meet Europe’s investment needs. “There are multi trillion dollars out there. I hope it works, but this whole system needs to be reformed.”

Asiamoney meets Secretary of Finance Cesar Purisima in a booth in a Hanoi conference centre, promoting Manila’s role as the next host of the Asian Development Bank annual meeting. He is flanked by images of the rolling chocolate hills of Bohol, while a TV shows idyllic beaches. It’s an agreeable backdrop and, given the Aquino government’s push to boost tourism infrastructure, not wholly incongruous. But it’s in contrast to the more rugged challenges that Purisima faces in dealing with the Philippine national finances.

Foremost among them is the tension between two competing goals. On one hand, the country’s GDP deficit – 3.74% of GDP at the end of 2010 – takes valuable money out of the country and pours it down the black hole of interest payments; clearly that deficit has to come down. But on the other hand, there is a need for investment in almost all areas of the Philippine economy, so as to foster growth. Doing both seems a near-impossible trick, while oil and food inflation make matters harder still.

But Purisima, who projects an enthusiastic calm, is full of ambitious targets  – not least a sovereign upgrade to investment grade. He points out that a 3.74% deficit was actually better than the country’s 3.9% target last year, and that this year’s target is 3.2%: Ps300 billion, but coming down. The long term aim is to get it down to 2% of GDP by 2013.

But must that come at the cost of impeding vital spending? He says not. “When that [his 2% target] happens, our interest to GDP ratio will go down, creating more fiscal space for additional investment,” he says. “And when you do that, you get into a more virtuous circle. Our hope is we will be rewarded with an upgrade to investment grade.”

At a time when the US, Japan and a host of European economies are staring down the barrel of a downgrade, Purisima’s hopes seem unusual. But he’s not that far out of line, and indeed Fitch Ratings upgraded the sovereign to BB+, the highest level before an investment grade rating, in June. Standard & Poor’s and Moody’s are the next notch down. Purisima is a keen student of peer country economic indicators, and sees a mismatch: for example, debt to GDP, at 56.5% in the Philippines, is almost identical to India’s 55.9%, yet India is investment grade. Furthermore, if a sinking fund for bond redemption is netted out, he says, the real figure is just 43%. “We have never defaulted in our long history,” says Purisima. “We have proven to be good creditors. And all our numbers have been improving dramatically: foreign exchange reserves are at historic highs, NPL ratios are below 3%, our industries are growing and we have a favourable demographic.”

“The market is already allowing us to borrow at close to investment grade prices,” he says. And an upgrade would have a dramatic impact on the Philippines. “The flow of investments will increase, more jobs will be created, more taxes, less deficit, and less debt. That will be crucial in reducing poverty in the Philippines.”

Analysts do see some progress. “The budget deficit has improved a lot,” says Luz Lorenzo, economist at ATR Kim Eng in Manila. “This year in particular it’s way below what the government was targeting.” But she doesn’t accept that it’s come without reducing spending. “It’s mainly because spending has actually been contracting. Revenues are growing, so that’s fine, but spending has been cut drastically.” Since the government has pledged no new taxes, the best way to reduce spending without reducing growth is to cut corruption, and that has been the government’s focus to date.

Will that be enough in the long run? “Fiscal consolidation is important to ensure that debt levels come down further,” says Prakriti Sofat at Barclays. “Rating agencies are also focusing on the fiscal/debt trajectory closely. The administration is going after tax evaders and we are seeing some traction with revenue growth being robust.” But she is not sure the tax promise is sustainable. “In order to really boost the tax to GDP ratio to create the fiscal space to increase infrastructure spending, our sense is that some increment in tax will be needed.”

One of the ways in which this government, and others before it, have sought to improve the lot of the Philippines has been to increase the role of the local currency, the peso, in debt markets funding. In July – subsequent to our interview with the finance secretary – the Philippines completed a record peso bond exchange, which extended maturities by an average of two years. More than Ps100 billion of shorter-dated notes were exchanged for new 10.5 and 20-year bonds, which had the dual effect of freeing funds for investment today, and improving liquidity at the longer end of the curve in the Philippines generally. It was the sixth such swap the Philippines has attempted, and they are proving increasingly successful: a previous deal, in December, attracted Ps50 billion of demand for a 2020 bond and Ps150 billion for 2035, in stark contrast with a local currency swap deal launch in Indonesia around the same time, which failed.

In July another exchange was announced, this time from dollar bonds into global peso notes, in an attempt to reduce further the foreign debt load. Already, the yields on local currency debt are looking very favourable, from a state perspective: 4.68% on its January 2016 bonds in July, compared to well over 6% earlier in the year.

When we spoke with Secretary Purisima, he said the aim was to borrow 73% of funds in pesos in 2011, and 27% from foreign markets, compared to 67/33 the previous year – which was, itself, a heavily local split compared to previous years. Purisima says his long term goal is for foreign currency debt to account for just 20% of total national debt.

“In the first months of the Aquino administration we have floated peso bonds twice: once for 10 years and once for 25, the first in Asia to do so,” he says, referring to the December fundraising (as the July swap took place after our interview). “We plan to continue to do that, especially for liability management.”

These efforts have impressed the investment community. “The Aquino administration has a clear strategy to improve the debt dynamics of the sovereign by not only reducing reliance on external borrowing but also making a concerted effort to diversify the sources of funds and extend duration of debt,” says Sofat at Barclays. And it’s not just handy because it alleviates foreign exchange exposure, but has a potentially very important impact elsewhere.

One of the reasons Purisima is so keen to shift to peso funding is because he believes a long-dated curve in pesos will help with infrastructure development. “Opening up the 25-year market was a move in preparation for infrastructure financing. That will allow project proponents to fund projects in pesos, matching their revenues in costs.”

This is a familiar subject in the Philippines – and frankly one that causes foreign investors to roll their eyes. Successive administrations have shared grand visions for public private partnerships and infrastructure finance in the Philippines; most efforts have foundered.

The Aquino government is no less optimistic than predecessor governments; Purisima says there are 73 PPP projects in a preliminary list, to be updated each quarter, with a thrust in tourism, airports, roads and ports, along with energy, mass transit and tollways. There are also PPPs planned in education and hospitals. “It’s a broad effort,” he says. “We are confident we have made enough changes in our PPP framework to make it attractive.”

What changes? Examples include Aquino guaranteeing that approvals will come within six months for solicited projects; a steady pipeline of projects (“so that companies will be willing to invest in a theme in the Philippines, knowing that if they lose in one project there will be others to follow”); the opening of the capital markets to longer term borrowing; greater transparency; and centralizing the unit for processing approvals under one roof. “We are doing a lot of things. The Philippines is now open for business under management, better governance, and an environment that offers a great future with the integration of Asean.”

That’s the sort of quote that’s designed to wrap up interviews, and indeed articles. But not everyone shares his enthusiasm. Asked what is happening in privatization, Lorenzo says: “Nothing. This is the biggest disappointment from this government.”

But, that said, she hasn’t given up on them. “On the other hand, they say they want to get it right. The PPPs are actually an offshoot of the BOT programs from before, so it’s not as if this is totally new; in the past it has been filled with corruption, with a lot of unnecessary spending, and they want to get it right and to make sure the right safeguards are in place. That’s a valid reason.” If it results in proper projects, then the slow progress can be understood, she says. “If you have to face up to delays in projects but the trade-off is that they will more efficiently administered, with spending that is more productive than in the past, then that’s a good trade.” There is something of a precedent here: privatization in the power industry was expected to bloom after legislation was passed in 2001, but nothing happened until 2004, and even then only with small plants. “People were asking why it was such slow going, and they said: we were trying to get it right. Then the sales became much faster and there’s no taint of corruption in those transactions.” It will be a while before it becomes clear if the government is going slow to get things right, or just going slow.

Another challenge the Philippines faces is inflation. It’s not as intense as in some places in Asia, as the country has enjoyed strong rice harvests and so has had relatively stable food prices, but fuel is a consistent challenge. Purisima says he believes the Philippines is “ahead of the curve”, but Bangko Sentral ng Pilipinas opted to keep its policy rate steady (at 4.5%) at the last meeting when some, like Barclays, had expected a hike. After the meeting, the assistant governor of the BSP called policy setting “a balancing act”, between price pressures and supporting growth. It is also concerned about, to use his words, “a flood of inflows”, and inflation is running above the bank’s 3-5% target, though it forecasts a full-year number of 4.7%. In truth, the Philippines is being saved from greater inflationary pressure by a strong peso and a weak dollar, mitigating the cost of imported items. And since that clearly can’t be relied upon forever, Aquino has pledged to improve agricultural productivity, something that is probably going to need greater access to financing among farmers and a lot more investment in irrigation. “If there is going to be sustained pressure, it will have to be productivity that delivers,” says Purisima.

Aquino took power with the largest ever mandate of a Philippine president; so what’s he doing differently? Purisima says his priorities are corruption, infrastructure and some policy issues. Previous administrations have already proven the country is quite capable of building strong new industries out of nowhere: BPO outsourcing is the obvious example, but it’s increasingly true of shipbuilding too. And, beneath these images of Boracay and Bohol, it’s clear that tourism is being relied upon to deliver a lot of growth. Purisima calls it “a low hanging opportunity”, partly because he expects the number of traveling Chinese tourists do double to 100 million, “and the Philippines is well positioned to take advantage of that.” The skies around Metro Manila have been opened to allow new airlines to fly in – Air Asia will be the latest example, following ANA – and there is an initiative to position the Philippines as “right in the centre of the coral triangle”, as Purisima puts it. Much of the proposed infrastructure PPP work revolves around infrastructure to drive those tourism arrivals.  “The beauty of tourism is it is 100% value added,” he says. “Jobs will be created all over the Philippines, in rural areas where poverty is highest, and you have multiplier effects into food, services and tourism. We’re hopeful our 3.5 million tourist arrivals will double within a short period of time. There’s no reason why we can’t reach that number.”

Purisima is also pinning a lot on integration of Asean, where he claims a level of seamlessness which is not always apparent to the outside world. “You’ve seen it in the electronics industry,” he says. “People used to say our industry was not sustainable because the supply cluster and the customer cluster were not there. But it’s one of the 11 industries to be integrated in advance of 2015 integration, and now moving products from Manila to Penang to Singapore is like moving them from Chicago to the Silicon Valley. It’s harmonized. It’s all efficient now.” He is clearly a believer in Asean as a powerful, homogenous bloc. “ You’re going to have an economy worth $1.6-1.8 trillion, a very favourable demographic. And the Philippines is very well positioned to participate in that: we have a 100 million population, who are very mobile – 10 million of them are outside the Philippines right now – and speak English.”

This brings us to the extraordinary Philippine diaspora: Lorenzo estimates that remittances from overseas Filipinos make up 12-13% of national GDP. And it’s the very first thing she mentions when asked about threats to the Philippines. “The main concern right now is the appreciation of the peso because we have such a huge dependence on our overseas workers.” She’s also troubled to see Saudi Arabia seeking to use more Saudi nationals rather than migrant workers; a wider use of that policy could have a significant impact on the Philippine economy.

So is the juggling act of reducing the deficit, maintaining spending and not raising taxes achievable? It all depends on how successful Aquino is in cutting corruption from the system. “The drive to reduce corruption is the main platform of this government, and an important one,” says Lorenzo. “When investors talk about the Philippines, one of the usual complaints is the level of corruption: the difficulties and high costs involved in doing business here. If it is reduced, it may be a catalyst for the Philippines finally making it on to foreign direct investors’ maps.”

Euromoney, April 2011

Chief investment officers of sovereign wealth funds are, by definition, a rare breed. Despite the $3-4 billion of global capital they manage between them, there are only about 40 such funds in the world. Scott Kalb is rarer still: a foreign CIO.

Kalb works at one of the newest sovereign funds, the Korea Investment Corporation, which was founded in July 2005 and really only started putting money to work in November 2006. Kalb was not there at the start – he replaced Guan Ong, another non-Korean, as CIO in April 2009 – but he is nevertheless instrumental in shaping one of the sovereign funds that is most animatedly discussed by the fund managers who pitch them for business.

KIC is one of a cluster of sovereign funds that comes with a somewhat nebulous mandate. Unlike the sovereign funds of Abu Dhabi, Kuwait, Qatar or Norway, it does not have to invest the proceeds of a depleting single commodity asset like oil and gas. Unlike the Government of Singapore Investment Corporation, it does not have overall responsibility for a country’s foreign exchange assets. Unlike Australia’s Future Fund, it does not set out to meet a clearly defined need like an unfunded pension liability. Instead, like fellow newcomer the China Investment Corporation, it has no liabilities, and no obvious mandate bar protecting and generating a return on sovereign wealth for some as yet unspecified future need. “We don’t have a liability stream, so our job is to protect and grow this capital for the benefit of future generations in Korea,” Kalb says on a snowy January day in Seoul. “They haven’t yet defined how this money is going to be spent – we hope it will be spent on positive social infrastructure, or other things that will benefit the people – but in the meantime our job is to protect it and grow it.”

Trying to compare sovereign wealth funds, with their myriad mandates and attitudes, is “like a blind man trying to describe an elephant by touching it,” Kalb says, and the constituency of sovereign funds without liabilities is a small subset of the sovereign wealth world. The lack of that liability stream ought to mean a greater freedom in investment approach, and since his arrival Kalb has been trying to develop an investment policy that takes advantage of that. “When I first came here we were 100% in publicly traded fixed income and equity – 70% of it in fixed income,” he says. He and his team then moved that to 50-50, then in June of 2009 introduced an alternative investment program, which really meant investing as an LP in private equity, hedge funds and real estate. Next came commodities and inflation-linked bonds, and then strategic investment.

“The first thing you’ve got to do if you want to create a bulletproof portfolio is you’ve got to diversify,” he says. “You want uncorrelated return streams. And if you are a sovereign wealth fund without a liability stream, one of your biggest advantages is a long-term investment horizon.”

But that doesn’t fix all your problems. “Being a long term investor is no magic bullet,” he continues. “Just because you can invest for the long term doesn’t mean you are always going to make money: if you invested in the top of the market in 2007, even though you are a long term investor you may never get your money back. Being a long term investor doesn’t mean you can be a blind investor, but it is a great tool to have in the toolbox and it can help free an asset allocator to look for and collect attractive risk premiums.”

Carrying this out has meant a steadily increasing exposure to alternative assets, and this is the reason the KIC is being so excitedly talked about in asset management despite total assets (around US$37 billion at the end of 2010) that are relatively modest by sovereign wealth fund standards. When last disclosed in the 2009 annual report, alternatives occupied just under 7% of the portfolio; today, in terms of committed capital, it is a little over 10% (though the precise figure won’t be disclosed until the 2010 annual report comes out shortly). And Kalb isn’t finished there: he thinks 20% is a logical ceiling. “Attractive risk premiums arise in areas that are beaten up, where there is mispricing, or a lack of investors or liquidity, and often they are things that may take some time to work,” he says.

Similarly, KIC launched a strategic investment program in June, allowing it to take direct stakes in companies, notably Chesapeake Energy. Again, full year returns won’t be clear for another month or so, but Kalb is clearly pleased so far. “Normally when you do alternative and strategic investment there’s a J-curve effect: it takes a while to see your performance, and your costs are front-loaded. But we’re ahead in all of our alternative and strategic programs, and it’s all making money even on a short-term basis. That helps in expanding those businesses.”

It’s useful to be able to demonstrate good news, because although Kalb has the benefit of working without the hindrance of liabilities, he does face some distinct challenges.

One is the fact that the KIC is funded by two separate sponsors: The Bank of Korea, which is Korea’s central bank, and the Ministry of Strategy and Finance. Most of the initial funding came from Bank of Korea; the finance ministry has provided most of the subsequent funds in blocks of $2 or 3 billion apiece in the meantime; and this coming year, there will probably be about $8 billion more contributions, this time split between the two sponsors.

This would be fine if the two sponsors brought the same attitude to risk and investment, but they don’t. The central bank is naturally conservative, the ministry more inclined to take risk for returns. Some say the discussions over how these interests should be represented in the portfolio can get heated.

For his part, Kalb says: “As you’d expect, the money you manage for the central bank is more conservatively managed because that’s their job. We try, within their frame of reference, to be a little creative and to deliver returns for them. The ministry is a bit more flexible in their capital and a bit more risk-oriented which makes sense: it can afford to be more strategic and have a longer vision, which gives us much more flexibility.” He says, though, that positive returns so far have led the central bank to gain comfort in KIC’s approaches; “we’re an important conduit for them to invest capital in areas other than treasuries and fixed income. They can take the money they don’t need for policy purposes and are comfortable allocating and placing it with us.” In this context the likely commitment of Bank of Korea funds this year – the first new allocation since the original US$17 billion funding – is significant.

Asked if it’s possible to keep both consistently happy, he says: “Nobody’s happy all the time. In a variation of what President Lincoln said, you can keep some people happy some of the time but you can’t keep all people happy all of the time.” He says KIC reports to its sponsors on a segregated basis and “in terms of managing these disparate interest, that’s our job.” The big areas of overlap in the portfolio are managed collectively or on a pari passu basis.

Another, related, challenge is that Kalb works in one of the few big sovereign wealth funds that exists in a vibrant democracy with a lively parliament. If we accept that Singapore, which is nominally a democracy but could hardly be called a vibrant one, is a separate case, then out of the biggest funds only Norway and Kuwait (with a vigour of parliamentary debate that surprises outsiders) are really structured for direct public scrutiny of their behavior. Norway’s vast sovereign fund is a case in point: after almost flawless returns for decades, the fund had one bad year and faced a parliamentary inquiry. Similarly KIC has undergone investigations and public fury over its $2 billion investment (before Kalb’s time) in Merrill Lynch, still heavily underwater today.

“From my point of view, this is a very important part of the democratic process,” says Kalb. “People have a right to know how their money is being invested, what it’s doing and what the thought process is behind it. I believe in it, the institution believes in it and we want to support it: it’s good for transparency.” He says the only disadvantage is getting caught in “the political winds that may be blowing,” not in terms of specific investments – which nobody has the legal right to force KIC to make – but in things like new hires and salary ranges. “That’s part of my job, to help the organization to move forward to become much more like a global private asset management company, even though it is 100% government owned.” On the Merrill investment, he says it “remains a thorny issue… but it’s history. I came here to manage the portfolio on a forward-looking basis. You can’t manage money from a position of regret.”

Kalb was an interesting selection in a country which tends to be hands-on with its state vehicles, especially given this level of public scrutiny. Quite apart from being an American, Kalb’s background is steeped in hedge funds: he was principal and CEO of Black Arrow Capital Management and a senior equity portfolio manager at Tudor Investment, as well as having worked at places including Citigroup and Drexel Burnham Lambert.

In fact it’s not quite as out-there as it seems: Kalb spent much of the 80s in Korea, and three years working for the Economic Planning Board within the government, subsequently merged into the finance ministry. He speaks Korean and considers the country “a second home”. But nevertheless it was a bold appointment. “I think it’s to their credit that they are willing to bring in an outsider to this kind of key position,” he says. “There are many foreigners working in lots of the sovereign wealth funds but I don’t know any that are in this kind of position and I think that speaks volumes about Korea’s intentions to put best practices in place, to adhere to global standards, and to be willing to tolerate some potential discomfort to achieve those objectives.”

Foreign fund managers talk effusively about the KIC, far more so than the country’s National Pension Service, despite the fact that the NPS has a vastly greater pool of assets to target. “KIC are ones to watch,” says one. (Fund managers hate being quoted directly about sovereign clients so all have been kept on background in this piece.) “When they were first announced, they were the institution everybody had to work with, even though in the grand scheme of things they are still pretty small,” says another.

There is a lot of chat about the relationship between the two sponsors and the impact it has on the overall mandate; “we think Scott’s view is that they will use the BOK money as beta exposure, and offset that with high alpha using the MOF money,” says another. And there is just as much chat about the manager being particularly tight on fees. But people want to be involved with it. “Scott says he wants managers to visit him only if they have a true sustainable alpha capability,” says one manager. “He is not willing to pay for beta generation.” Another echoes the point. “When you approach them they are very clear: they will not set an appointment unless you have a clear alpha generating capability.”

And they’re right. Kalb hates paying for beta, and so the sophistication he has brought to the place comes with disadvantages for external fund managers. Between 2008 and 2009 the proportion of funds that were outsourced to external managers fell from 60% to 35%, although Kalb says it’s likely to stay around that level.

Kalb is a believer in what he calls “beta architecture”. When you manage a portfolio with a 5% real return target, he says, 3.5 to 4 points of the return are likely to come from beta, just 1 to 1.5 from alpha. “Alpha is very elusive and it’s a zero sum game; beta is what you get in the market,” he says. Initially, a lot of that passive beta exposure was outsourced, but as the KIC has built ability in different asset classes it has increasingly brought that exposure back in-house. “There is no reason to pay for enhanced or passive fund management if we we can do that ourselves, and we can,” he says. “When you give a passive mandate out, you’re throwing in the towel on any kind of alpha. You’re saying: I give up, I just want the beta, and you wind up getting the beta minus cost.”

“So the idea for externals is that we want guys that can really deliver,” he says. “I want to focus my risk budget on guys who can give me alpha, not just market returns.”

Other changes are underway at KIC: an increased benchmark emphasis on emerging markets, so as to better reflect their contribution to the world economy rather than world capital markets, is an example. “If you don’t make that adjustment you will constantly be behind the trend, trying to catch up.” Another is increased exposure to credit. But in particular Kalb is seeking to change the way allocation is thought of, to a discussion that starts with risk tolerance. “Benchmarks are very useful in terms of monitoring performance and controlling your direction,” he says. “They are very poor in terms of risk control. The assumption is that your risk free position is to be neutral to the benchmark. In real terms that’s not risk free at all, it means you have 100% benchmark risk, and we all learned in 2008 what can happen when you do that.”

“It’s risk adjusted returns, that’s the name of the game, and the object is to sit down and have that risk discussion first. Then we can design a portfolio that makes sense.”

Asked if he feels that’s where KIC is up to today, he speaks of dialogue and progress, but his emphasis is on a work in progress – for everyone in the enterprise, from sponsors to management to himself. “We’re continuously adjusting as we go along,” he says. “It’s all a growing experience.”

The Australian, December 2010

If Magnus Bocker has appeared sanguine about the sometimes vicious reception to his proposed merger of Singapore Exchange and the ASX, that’s because he’s seen it before. This is, by his count, his 10^th potential exchange merger, and none of them have been easy.

“There are normally four groups you need to work with: clients, shareholders, regulatory and political,” says Singapore Exchange’s Swedish CEO. “And in my experience on exchange mergers, I’ve had the pleasure of having issues with all of them. I don’t know which is the toughest. But you very rarely find an integration that takes everybody on board straight away.”

To see the article as it ran click here:aus18dec2010ac031[1]

What’s remarkable about Bocker’s story is that his sequence of mergers only began in 2003, when he was deputy CEO of a market technology provider called OM Technology, which operated the Swedish stock exchange. That year, OM merged with HEX Integrated Markets, which ran the exchanges of Finland, Estonia and Latvia.

Rising quickly to CEO, he then orchestrated mergers with exchanges in Lithuania, Denmark, Iceland and a stake in Norway, before triggering a bidding competition for this entire Nordic-Baltic bloc between Nasdaq and Borse Dubai (Nasdaq won). Nasdaq OMX was formed in February 2008 – by which time he’d overseen another merger in Armenia – and Bocker, just five years on from being a tech company deputy in Stockholm, was president of the world’s largest exchange company.

Asked what he learned along the way that he can apply now, his answers are characteristically logistical and practical rather than political: he is an operations man and his comments are peppered with references to efficiency and service rather than the landmark vision one might expect.

“When you talk about a merger you talk about cultures coming together, learning to work and live together,” he says. “One experience I’ve had is that sometimes there is more in common between stock exchanges regardless of borders.” Stockholm and Helsinki’s stock exchanges had more in common than Sweden’s own options and stock exchanges did, he says. “In our little world of exchange mergers, the challenges are sometimes local. It can be easier to get two together cross-border than in the same country.”

The other lesson he highlights is that “money has started to go cross-border much faster than we as exchanges have helped it to do so.” That’s not true of other financial service providers, he says: if you want a Japanese mutual fund in Australia you don’t expect to go to Japan to get it, you go to an Australian provider. “Exchanges have been a little bit behind on that. We come from an environment where we are not used to helping our clients facilitate their business.”

Both comments are revealing, because they speak very much to Bocker’s vision of exchanges as service providers, unromantic pieces of market infrastructure rather than staid national icons. But after the political mauling his ASX bid has received in Australia, one would have expected him to raise that as a lesson mastered elsewhere. Asked if the political storm here has been worse than in other mergers, he responds: “Absolutely not.” He does, though, see the point. “In all exchange mergers there is that nationalistic sadness but comes up. But it’s not like Paris Bourse disappeared just because Euronext [which combines the Paris, Brussels and Luxembourg exchanges] got together with NYSE. And it’s not like the ASX will disappear just because it continues to develop. But it takes a while before we get accustomed to the thought.”

Moreover, he thinks some of the worries politicians have highlighted are not only valid but essential. “It is very important that the question of national interest is raised,” he says. “Exchanges need to add value to countries. If we cannot deliver more national interest by this combination then we shouldn’t do it. Politicians who don’t ask that question are not understanding what we as operating exchanges are really here for.” He has less time for questions that belittle Singapore itself, insisting that the standards of governance, independence, transparency and shareholder feedback are at least as strong in Singapore as anywhere else, without state interference.

None of it has shaken his conviction that mergers are the right thing to do. There was a much clearer rationale in his early mergers in Nordic and Baltic countries, though: Europe at that time was amid sweeping regulatory change, and it was obvious to all that 40-odd exchanges could not survive independently in what was increasingly a single bloc of capital. “It was a natural driver to say: we need to reduce the number of exchanges, to simplify the network,” he says. It was a simple as, for example, thinking that Finland’s Nokia and Sweden’s Ericsson, or the pulp and paper companies of both countries, would represent a powerful sector in combination. “There was a vision that in order for us to be more competitive in the European landscape, the Nordic exchanges [in combination] were big and strong enough to play a significant role in Europe.” But in his view it’s always flows of money that drive consolidation. “If there is an opportunity for cross-border mergers it never starts with the exchanges, it starts with the underlying capital markets.”

The Nasdaq merger was of a different order again and was more opportunistic, a symptom of its time. “When we started the journey with the Nordics, that [Nasdaq] was not part of the plan. It was not even conceived as an opportunity.” But it wasn’t the first such deal Bocker was involved in. When Macquarie Bank bid for the London Stock Exchange in 2005, it did so with OMX in the background. Bocker, who is a big admirer of Macquarie and its people, denies he was in line to be the CEO – “We never discussed it, I find it unlikely that I would” – but his impressions of Macquarie and its bid are instructive about how he sees exchanges. “The team at Macquarie really saw what the exchange business is all about,” he says. “At that time it made a lot of investments into airports, bridges, toll roads. And exchanges, to some extent, are not too far away from that: a lot of stable recurring revenues. It was very logical, and we saw we could do something together, fronted by Macquarie.”

“Logical” is a very Bocker word, fitting into this rationale for creating progressively bigger liquidity pools around the world to meet a changing market. It fits, for example, his interesting decision to partner with the dark pool liquidity provider Chi-X just a few months after taking on the Singapore Exchange top job. Exchanges generally are worried about dark pool providers and wondering how to deal with them; to Bocker, it therefore made sense to partner with them instead of fight them. “Over time as the market develops there will be different ways to cross a trade,” he says. “The way we traditionally do it, in exchanges, is one way but we shouldn’t get stuck on one model. We ought to embrace new models when technology makes it possible.” He accepts that Chi-East, the tie-up with Chi-X, “might have some short term issues for us as Singapore Exchange, but long term if it’s good for our clients that will benefit our business.”

What was less logical, though, was taking the Singapore job in the first place. Bocker’s president title at Nasdaq OMX was not ceremonial: he was responsible for listings, corporate services and, surely his favourite subject, market technology. His wife and three children, two of them then at high school age, were settled. His life and work, as he puts it, were “in harmony”. Why move? Bocker says he was initially polite but not keen, but eventually decided to do his own due diligence on Asia, Singapore and Singapore Exchange itself. Swiftly he liked what he saw: the Asian time zone as an engine of world market growth and fund flow; Singapore as a senior financial centre within it, with the necessary regulatory stability, market strength and “willingness to change and improve”; and the exchange, “a more open and embracing company than I thought.”

The challenge has been different. “What we did in the Nordics and OMX Nasdaq was a competitive situation where we needed to bulk up and start saving costs and work differently. At Singapore Exchange it’s a question of how do we grow faster, how do we bring on all those products we don’t have today.” But clearly the prospect of European-style change in Asia must have been attractive to this consummate dealmaker: the sense of a shifting landscape. “There will be new opportunities, new combinations we never thought of before. I’m not sure SGX and ASX was a logical combination five years ago, maybe even a year ago. But suddenly this year it turned out to be a good combination.”

It’s perhaps not surprising to find that a 10-merger man is also a 3 hour 53 minute New York marathon runner; nor to find that he claims a certain social zeal in what he does. “There has never been starvation in a country with a well-functioning stock exchange since 1921,” he says. “We add value to society. That makes it easier for me to enjoy every day, to spend the time and drive it.”

And whether or not the ASX deal gets over the line, there’s no doubt there will be other deals. It’s inevitable. “I like old sports cars, but I’m driving a new Lexus hybrid, because the market has developed,” he says. “For stock exchanges, it’s the same thing.”

DBS has long been the most outspoken southeast Asian bank about the goal of being a regional player. For more than a decade, different CEOs have outlined their vision for a regional banking champion. Jackson Tai used to talk of a pan-Asian bank, headquartered in Asia, run by Asians for Asians; under Piyush Gupta, appointed in September 2009, the mantra has become “the Asian bank of choice for the new Asia.” Much still has to be done before one could truly consider DBS the pan-Asian power it aspires to be. But the logic underpinning the idea looks better than ever.

“It’s quite clear to me that trade patterns within the region are on the verge of some profound changes,” says Gupta, speaking on the 44^th floor of the bank’s Singapore headquarters; out the window the city’s vast container port, a visible barometer of the health of Asian trade, flits and buzzes in the background.

Through the 80s and 90s, he says, the growth of Asia was built on the supply chain of manufacturing and exports, with Asean countries sending materials into China to be assembled and shipped out to the west; intra-regional trade in the strict sense of the term, but ultimately still reliant on a final export to Europe or the US. “What’s beginning to happen is consumption in Asia is changing. Increasingly it’s Asian companies supplying Asian consumption demand.”

DBS recently published research showing Asian incremental domestic demand growth relative to the US, a comparison that starts out in 1980 when for every dollar of US incremental consumption, Asia would generate 44 cents of consumption. This year, Asia will deliver $1.02: outstripping US consumption for the first time. “This is Asia’s year,” wrote economist David Carbon. “What we are talking about is the biggest structural change underway in the global economy today: the shift in who generates the new demand every year. This year, Asia will generate more of it than the US. In so doing, Asia will become the world’s biggest driver of economic growth. Chances are it will remain so for the next 50 years, if not for longer.”

And for a bank like DBS, this trend is potentially transformative. “If you’re part of Dell’s total supply chain, there’s very little bank intermediation you do when they export from Dell Penang to Dell China, though it goes into the trade flow numbers,” Gupta says. “But when it’s from an Asian company to another Asian company, it’s a completely different role you can play as a bank. The change is quite profound.”

And hence the business model of a pan-Asian bank. Gupta shares the vision of his predecessors, but with a slightly different method of achieving it. “This whole notion of the Pacific century, the shift of the centre of economic gravity to the east, is even more relevant today than it has been in the last decade,” he says. “In that context, for us to try and mark our fortunes and grow in this part of the world is a logical thing to do. It makes a lot more sense than trying to seek out opportunities in Europe and the US.”

Where Gupta differs in his vision from some of his predecessors is in his sense of what DBS, at heart, really is. “We have a lot more clarity today about what DBS is good at and what this Asian footprint should really look like,” he says. “There is a recognition that we are really a good commercial bank, a good universal bank.” That, he says, does not eschew the investment banking arms of the business, “but there is a recognition that this will not be our forte, to go out against the bulge bracket banks in high end capital market transactions. It’s not our principal area of strength. So my vision of being an Asian bank is now a very clear focus on wanting to be an Asian commercial bank.”

Gupta hopes to achieve that with two clearly defined strategic objectives, one geographical, the other based on regional business lines. Not long after arriving at DBS he announced a quite specific directional statement calling for a 40:30:30 split of earnings within five years, with the 40 coming from Singapore, and 30 apiece from Greater China, and south and southeast Asia (principally India). On the business side, Gupta wants to build a high-quality regional platform in two key areas: SMEs and wealth.

SME business is a classic play on growing regional trade. “We are a top end corporate bank in Singapore but what we are even better at is the SME space,” he explains. It is already significant in that business in Hong Kong through the old Dao Heng business, it has built a presence in China and Taiwan, and “we have a product suite that is very complementary to the needs of the SME: we are big in trade finance, warehousing financing, factoring, receiver financing – most of what SMEs in Asia really need.”

Wealth management seems a logical fit too. Partly this is a function of Asia being the area where the greatest individual wealth is being created – benchmark surveys such as CapGemini consistently rank it foremost in numbers of new millionaires or multimillionaires – and partly because Singapore has so effectively made itself the region’s hub for private banking. “Within Singapore there is nobody else who is more gold standard than DBS, and our ownership and pedigree has helped us to create this image of safety. Through the whole crisis, one of the few banks that benefited from the crisis was us: we had large inflows of deposits through the entire period.” Already, based on this Singaporean strength, DBS has a strong regional mass affluent customer base and certainly ranks in the top 10 private banks in the region. “But to take that platform and build on it regionally we think is a distinct possibility.”

Gupta is candid about shortfalls in DBS’s regional presence. “If you want to be a regional bank, you have to do a lot more work in terms of defining standards around our policies,” he says. “DBS sort of stumbled into being a regional bank: we were a Singaporean bank, bought a Hong Kong presence, started going into some more countries but have by and large been a Singaporean bank managing externally. We did not have the opportunity to step back and put in place regional management frameworks.” That has created a disjointed structure. “Frankly if you go around the countries we do things differently in every place. We don’t even have consistent technology platforms across different countries. That is a singular priority for us. The whole regional or pan-Asian approach is going to be built in the way the HSBCs and Citis of the world built their global approaches 100 years ago: get the manuals, the how-to books in place.”

It is no surprise to hear these institutions mentioned so early in the interview. Gupta clearly admires HSBC and refers to it a number of times, but Citi is the bank that is in his blood: most of his working life was spent there, starting in 1982, and he was Citi’s CEO for southeast Asia Pacific when approached by DBS. He has run individual country offices in Indonesia, Malaysia and Singapore, has been regional director for global transaction services, has had a strategic planning role for emerging markets and been chief of staff of the corporate bank in Asia. One sees every one of these roles informing his thinking at DBS.

What did he take from his time at Citi? “Thinking about how to put in place a standardised framework to manage, while at the same time recognising the need for customisation and the individuality of different countries – Citi historically has done a great job of that which is why they have been able to build a fantastic emerging markets franchise,” he says. “That notion of getting the balance in a matrix management process, where you recognise the power and relevance of a country management construct, putting deep roots in the country, but at the same time the leverage you get from being a multinational player through technology, products, risk management policies – it is something I bring with me.”

He also says that Citi taught him the banking business is “fundamentally about two things: HR and IT.” He speaks of wanting to build a “consistency of culture” at DBS, through moving people around, through training, and focus on a consistent set of values – something else that could certainly have come straight from an HSBC mission statement. And the infrastructure will clearly be a priority for development under Gupta.

Getting DBS to the 40/30/30 split he wants is going to take time and effort. Many fund managers and analysts feel that DBS is not yet a regional bank in the sense that it aspires to, rather than a bank with twin hubs in Hong Kong and Singapore that runs successful but small businesses in other countries off the back of them.

There are already some noticeable differences in how Gupta wants to expand. One of the great regrets of predecessor Jackson Tai’s tenure was his failure to complete a purchase of Korea Exchange Bank; he had been a great believer in the trade synergies that would come with that bank. One senses Gupta would never have pitched for it in the first place: he doesn’t mention Korea once in the interview and his priorities are clearly towards less developed markets. The corollary of that is that Tai rarely mentioned India in interviews, yet for Gupta it appears more of a priority. It’s somewhat surprising that India already contributes nearly 9% of group revenue; he says business has been growing by 50 to 60% annually for the last five years. “While we are not huge by Indian standards, we are relevant,” Gupta says. “If you think about most banks with pan-Asian ambitions, nobody else has the India presence we do.” Indeed, it is hard to think of any Asian bank that has successfully built a presence in Asia, unless one considers Stanchart or HSBC Asian banks.

Oddly, though, Gupta has started his India drive by selling something: its 37.5% stake in Cholamandalam DBS Finance to its joint venture partner. That business targeted the unsecured consumer finance space. Why? “While I think in some ways that is a long-term opportunity, in the short term it is riddled with risks,” he says. “Chief of which, the credit infrastructure in India for being a part of the mass market is not very developed. A lot of people wound up extending credit to untested names and the absence of a credit bureau can make it very risky to do that.” Instead, in India, Gupta wants to do what he can within the regulatory environment, which is be a corporate and investment bank serving SMEs and only the highest end of the consumer banking space. “Can that change? Yes, if regulations change.” Nevertheless DBS reckons it can do a lot through its 10 branches in India, soon to be 12, and it would be no surprise if DBS’s next acquisition took place here if presented with a better fit than the consumer finance business.

The Greater China business is anchored out of Hong Kong, from the Dao Heng business purchased a decade ago in by far DBS’s most transformative ever transaction. Today, that business shows both a positive and a negative tilt.

On the negative side, DBS seems destined to be forever haunted by the 3.3 times book value it paid for Dao Heng back in 2000, because it came back to bite them yet again this month when Gupta concluded it was significantly overvalued in the books despite a significant writedown once before, in 2005. The books reflected it at 2.5 to 2.6 times book value; 2.2 would be more appropriate, the bank concluded, and the shift meant hitting the bank with a S$1.02 billion goodwill impairment charge, wiping out an otherwise healthy 30% rise in second-quarter earnings to S$718 million. An impairment charge doesn’t affect operating performance, regulatory capital, cashflow, dividends or even expansion of the business, but it certainly ruined the headlines and raises deep questions about the Hong Kong business’s prospects generally.

“Clearly,” Gupta says, “there are some shifts in the structural situation in terms of funding.” Hong Kong is the place in Asia where the global financial crisis and its impact on liquidity architecture has been most keenly felt. Those who were once happy to fund themselves entirely in the wholesale market will no longer do so. “There is a competitive war for retail deposits now, some of it driven by the Chinese banks who fund in the Hong Kong market, so in the short term it has created funding stresses that are likely to stay for at least the next year or two.” Comparing the Hong Kong business to the value it held in the books “there was obviously an imbalance,” he says, and as a new CEO it made sense to clear the slate early in his tenure.

Nevertheless, it’s a solid business; “if we can retain share – we have roughly 5% of the market – and continue to grow that business it will produce decent returns and allow us to be part of a deep and rich market,” he says. But that’s not really the point, and never has been: where Dao Heng has paid off for DBS is in the way it has helped it build a Greater China franchise.

“The bigger and more interesting raison d’etre for the Hong Kong business is really the anchor to the Greater China market,” Gupta says. “If we were to be in mainland China by ourselves today we would be the 60^th or 70^th largest bank. Given the regulatory environment, it would be a slow, long, hard slog to build a business of any substance. Hong Kong changes that for us.” As he says, every one of his customers in Hong Kong has a China angle of some description, be it SMEs serving the Pearl Delta or even individuals. Half the customers DBS has in China are from Hong Kong, and about half of the remainder are Taiwanese; likewise, Chinese companies moving out of the mainland tend to go to Hong Kong first, so that the biggest growth in DBS’s Hong Kong business today comes from the red chips. “We are participating in the flow, this two-way traffic, at all levels.”

China business, he says, is mainly driven by corporate and investment banking, and is growing at 40 to 50% per year. The franchise is increasingly being supplemented by a growth in affluent consumer business to help build a funding book, which then supports expansion of other areas. Gupta hopes to be in 15 to 20 Chinese cities, “and in those cities we hope to go deep through a sub-branch network.”

What about a minority stake in a mainland bank? “The issue with a minority stake is what is the strategic intent and what is the go-to plan.” A pure minority stake with limited long-term prospects would probably not be interesting as anything other than a private equity play, he says, though he would consider a stake in a bank with a willingness to build a pathway to full control when regulations allow.

Elsewhere, though, acquisition appears inevitable. “Organic growth is important and will shift the needle, but it will only get us so far. At the right time we will have to look at inorganic opportunities. My view in the medium term is the opportunities will arise.” Again he is quick to refer to India, where 2010 WTO commitments are likely to drive an opening of the market. Asked if the good valuations from the global financial crisis have passed, he suggests: “Asian valuations never really came off.”

Development in Asean is somewhat in its infancy: a stake in Thai Danu Bank, subsequently rolled into Thai Military Bank, ceased to be of much interest when it became clear DBS could not get the control it wanted, and Thailand is not a priority. There is little in the Philippines, a Vietnam licence was only recently awarded and the bank doesn’t even have one for banking in Malaysia, though it has a strong asset management business there. Outside the home base of Singapore, the only place one would call DBS significant in Asean is Indonesia, and even there one would think it could do more: the only other southeast Asian bank that has really spelt out a regional strategy is Malaysia’s CIMB, which has devoted most of its expansionist energy to the huge opportunity it sees in Indonesia. “We have a lot more work to do in that market [Asean],” Gupta admits. Indeed, 10 years after Dao Heng, it’s stil hard to argue there is true depth in any Asian emerging market.

But underpinning DBS’s vision are regional trends: the changing nature of Asian trade Gupta outlined at the start; the somewhat retro trend of primary goods and commodities coming back into fashion, making Singapore an increasingly important trading hub for numerous commodities; the growing importance of Africa-Asia trade.

One of the biggest themes concerns the way wealth behaves in Asia, which is central to DBS’s regional wealth management plan. “The Asian wealthy individual has always been more prone to taking market risk,” he says. “This is still a wealth creation rather than a wealth preservation game.” This is a consequence of European wealth tending to be several generations older, and Asian wealth more recent, but it has created a particular approach to private banking in Asia geared much more towards wealth growth than protection or transfer. But it may be that the financial crisis changed that. “We believe it has, and that there will be increasingly a need at the high net worth end for services on wealth preservation. This is going to change the type of provider you want and the type of product you want.”

The financial crisis, he says, “made it quite clear that there is a role for Asian providers, a meaningfully differentiated role.” Being non-American or European clearly helped with flows through the crisis. But is it enough? “What we need to do is this. We are seen as a safe play. We need to add to that and be seen as a smart play.”

The Australian Way, August 2010

On a glorious limestone hillside in Turkey’s Cappadocia, Andrew Rogers is supervising a team of 50 local carvers hewing the steps of an amphitheatre out of the earth. Beneath them, workers with a crane are hoisting a pillar of rock the height of a four-storey building off the back of a groaning truck. These are the final stages of a vast artistic endeavour four and a half years in the making, and you can see it all from the amphitheatre’s steps: 10 stone-wall and basalt sculptures extending two and a half kilometres down the valley, so big you can see them from space.

This is Time and Space, a collection of geoglyphs, or land art, and it is creativity on an epic scale. The installation in Cappadocia is big – 10,500 tons of stone, seven kilometres of rock walls – but not unique, for this is the 12^th location in which Melbourne-based Rogers has worked: 40 sculptures built by 5,500 pairs of hands on five continents, from Iceland to Slovakia, Bolivia to the Gobi Desert, Chile to Geelong. In sum, it is easily the largest contemporary artistic installation in the world.

See this article is it ran here: qa0810_Landscape.indd

When you are an artist on this sort of canvas, the vision is just the start: it’s an exercise in logistics, engineering, staff management and architecture. It requires a character that is not just creative but driven, patient and stubborn. “I’ve basically found out you can build anywhere, in the most difficult situations of terrain and labour, as long as people want it,” Rogers explains as we bounce around the site in a van. “You just have to be very tenacious and driven. Fortunately I’m both of those things.”

The road to this vast undertaking in Cappadocia really began in Israel more than a decade ago, when Rogers was teaching in an architecture faculty there. On a trip to a desert area in the south his colleagues told him they wanted to create something to attract tourism, and he suggested a giant sculpture. A year later, he walked back into the desert to create the first of four artworks there.

“In those days I wasn’t trained as an artist,” he says. “I was trained as an economist.” He had no idea of techniques that might make life easier. “I didn’t realise you could use surveyors. So we used to stand there in 40 degree heat for four weeks at a time and triangulate everything, making points in sand to lay out the sculpture.” Today, the same process takes three to five days.

Next he found himself doing the same thing in the Atacama desert in Chile, the world’s driest, having been inspired by the Nazca lines in Peru. “I thought, what a great idea, why don’t we draw some things across the whole of the earth instead of just one place? That’s the idea behind the whole project. A connected series of drawings on the earth.”

As for Cappadocia, Rogers first visited the region 27 years ago; like anyone who comes here, he was struck by its odd, spiky beauty. He always wanted to come back, and everything about the place suited his purposes. “Each time I decide there should be something of special significance that is inherent to the topography. Here, it’s amazing: the limestone formations that have been caused by nature are quite remarkable and unique. And it is impregnated with thousands of years of history.”

Like any colossal journey it started with a single step – or a phone call, to a sister of a friend in the local travel industry in 2006. “I asked who I could talk to and it went from there.” Then negotiations began. “Getting the permits is always the hardest part,” he says.  How do people feel when approached for something so unusual? “Most of them have never thought about it. It’s like Kleenex tissues: until they were invented nobody thought they needed them. But everybody is interested in preserving their history and heritage and fostering memories for the next generation.”

“You’ve got to find the person that’s interested, or the municipal authority or the elders who believe in the project,” he adds. In Cappadocia this required the support of two successive mayors to chase and approve permits, as well as numerous Turkish and western business leaders to provide funding. People like this need to be free-spirited sorts themselves. “He thinks what I do is quite normal,” says Rogers, impressed, of a local backer, “which is unlike a lot of people.”

For the art itself, Rogers tends to use a mixture of images based around central themes. “We perceive our existence in space and time,” he says. “In this world where technology is constantly advancing, human nature is not; it is often the values of the past that are most relevant today.” This theme, inherent to his work, comes through in many of his sculptures: A Day on Earth features 22 words such as memory, compassion and heritage carved in English and Turkish on basalt columns. Others take forms basic to life and culture – a grinding wheel, a palm tree, a horse – or reflect local myth, such as a Griffin and a double-bodied lion.

Common to every installation he has completed around the world is The Rhythm of Life, which started out as a bronze sculpture 17 years ago and whose original now resides in the National Gallery in Canberra. Rogers describes that original as “a dynamic structure in space, a series of points connected which make a line. It’s like life: all the connected influences we all have, friends, family, activities. It’s an optimistic symbol about life and regeneration.”

Then there’s construction, which began in 2007. Material is key to Rogers. “Stone has been intrinsic to civilisation forever,” he says. “It’s great to touch and feel rock and stone; it brings you back to the fundamentals about the earth, about what’s important.” The stone must be local and where possible nothing foreign is brought onto the site. “In Nepal we used mud with granite. In Chile, bird droppings with clay. Wherever we find a local technique that’s successful and stood the test of time, we use it.”

He has also always insisted on indigenous labour – a rule breached only once, when constructing in the Gobi desert in China, when the authorities decided the best way of getting things done was to give him an army to do the building. (“They don’t normally build sculptures and I don’t normally command an army,” he says.) In Cappadocia, almost a thousand local people were involved. Do they understand what they are working on? “They understand after they’ve worked on it. When they start, it’s a totally abstract concept.”

Relatively speaking, Turkey has been an extremely smooth project; the greatest controversy came with his insistence on paying men and women labours equally, which caused a minor revolt among some of the men. “They’re all challenging for different reasons,” he says. “In Bolivia we worked at 4300 metres, gasping for oxygen all the time. In some of the deserts we’ve been working in 45 degrees. Then you have people issues: too many workers wanting to work in India, and stopping fights between 300 people.”

There’s still a certain rustic approach to producing the art: Rogers judges levels by eye, then marks the pattern each metre with a peg in the ground. But with the workforce engaged, the building is in some sense the easiest part. Unbelievably, the Rhythm of Life sculpture in Cappadocia – whose walls, at the highest point, are two and a half metres high and hundreds of metres in length – was built in just 10 days, by a team of 380 stonemasons. The stones were simply picked up from the ground around the valley, passed hand to hand along lines of people; there’s no cement, no mortar, yet the dry stone walls are pristine three years after their completion.

So why build big? Does it change the meaning of a sculpture to make it writ large? “It doesn’t add anything to its meaning, but scale always adds another dimension,” Rogers says. “It’s more confronting for people. It’s taking the ruins out of being just a material into the realms of speculation.”

‘Visibility from space’ isn’t a casual claim either: Rogers commissions satellites to photograph the sculptures from 280 miles (450km) up. To help with visibility, he coats them, although the material varies with what is local; from place to place it has included cactus juice and bird droppings.

Even as Rogers opened his installation in Turkey on May 29, he was active elsewhere; the next step is Kenya. “It’s all set to go,” he says. “We have 1,000 Masai warriors who will come and camp around the site and build the structure.” It will bring its own challenges and quirks. “They don’t use stone for anything so it will be very interesting. It’s a totally abstract idea for them: they only use thatch.” The structures – which elders have requested include a lion’s paw and traditional markings from a shield, as well as the Rhythms of Life motif – will be made on a volcanic lava plain from deposits around the edges. “It’s going to be fascinating.”

As an installation on a sixth continent, this completes the objectives he originally had for his project. But one senses that it won’t stop here. “I have lots of invitations and if they are interesting places and interesting people I wouldn’t say no. It’s about getting an idea.”

SIDEBAR: Cappadocia

Cappadocia is perfect travel: stunning scenery; history; towns with accommodation and restaurants set up well for tourism without yet being ruinous; and a focus for unusual activities like hot-air ballooning.

The area is filled with curious limestone conical towers that have become known as fairy chimneys, and over the centuries many of them have become homes – or, more recently, hotels. Some have been used to carve churches out of the rock, magnificently painted inside. People have lived here for at least 4,000 years since the Hittites settled the region, followed by the Persians, Romans, Christians, Seljuk and Ottomans.

It is also one of the world’s best places to go hot-air ballooning, blessed with a rare combination of favourable wind and flying conditions and extraordinary topography to see from the air. Skilled pilots can not only navigate the balloons over the region’s most beautiful valleys but descend deep into them, just metres from the rock formations. Other balloons – there may be as many as 40 in the air – add to the extraordinary sight.

In Göreme, Cappadocia’s main travellers’ centre, is the World Heritage-listed Open-Air Museum, a clutch of rock-hewn churches and monasteries. Pay the extra TL8 (A$6) to enter the Karanlık Kilise, or Dark Church, painted inside with vividly colourful biblical scenes.

Elsewhere you can see underground cities, as many as eight levels deep, excavated in the sixth and seventh centuries to give an escape route for Christians fearing Persian and Arabic armies. 10,000 people lived in one of them, Derinkuyu, staying there for months, their air shafts disguised as wells.

More than anything, Cappadocia is a place to walk around, enjoy the scenery, eat well in excellent and friendly restaurants, and sit back with a glass of wine to watch the sunset from a hotel terrace. For many people it is the highlight of a trip to Turkey.

It is January 23 1960, and Don Walsh and Jacques Piccard are on top of a wonky submersible called the Trieste, pitching on 12-foot Pacific Ocean waves having just made history. Over the previous nine hours they have piloted their craft, called a bathyscaph, more than seven miles to the floor of Challenger Deep in the Mariana Trench – the deepest place in the world’s oceans. And now, waiting to be picked up by their support ships, they are already wondering who will follow them. “We thought that in a year or so there’d be more people out here with better machines, to explore these deep trenches,” Walsh says. “We certainly hoped so.”

Not so. Fifty years on, nobody has ever gone back; and since the death of scientist Jacques Piccard in 2006, Walsh – recalling the tale to Discovery Channel Magazine at his ranch in Dora, Oregon – is now the only man alive to have gone so deep. You might think of him as the Hillary of the ocean, except it’s even more pioneering than that: where hundreds have followed Hillary and Tenzing to the top of the world, none have ever followed Walsh and Piccard to the bottom.

This is the version filed. To see the article is it ran in Discovery, click here Trieste (3)

The journey really started for Walsh in 1958 when, as a submarine lieutenant, he volunteered to work on a program leased by the US Navy from a family of Swiss scientists called the Piccards. They had a submersible called the Trieste, an ungainly contraption comprising a thick-walled spherical cabin for crew suspended beneath a thin metal float filled with gasoline. “It looked like an explosion in a boiler factory,” Walsh thought on first sighting it. “I thought to myself: I will never get into that thing.”

The Trieste’s premise was simple: vent the ballast tanks to sink; slow or stop the descent by releasing solid weights filled with small steel pellets; and then, because the gasoline in the float is lighter than the water around it, return to the surface. The sphere itself, which would have to protect the crew from pressure 1,100 times greater than at the surface, was made of three rings, five to seven inches thick and glued together with epoxy at the joints. Walsh recalls the Admiral who ran the Navy’s Bureau of Ships coming to see the Trieste and asking how it was fastened together. Walsh told him about the glue. “Lieutenant Walsh, the Navy does not glue its ships together,” he replied.

But a glue-held submersible was in the spirit of the time, the Space Race era in which vast natural challenges were tackled with simple ingenuity. When the Trieste came back from one of its many test dives near Guam with failed glue joints caused by the differences in sea temperatures during the dive, Walsh says the team’s machinist fixed the problem with “a forklift truck and a large timber battering ram to put the pieces into alignment,” holding them together with a series of bands. “It was a remarkable piece of shade tree engineering and it saved the project,” Walsh says. Set against that, though, was a growing reluctance on the part of the Navy to court publicity, something he had to tackle when seeking approval for the record dive from Admiral Arleigh Burke. “The navy in its exuberance had claimed we were going to put the first earth orbiting satellite up. And they’d fire these rockets out of Cape Canaveral and they’d splash into the bay or they’d have to destruct them because they were heading for Kansas City. It was very embarrassing.” Consequently Walsh was told to garner no publicity: it would be promoted only after it was successful. “You tell [lieutenant Larry] Schumacher [who would be topside on Walsh’s dive], if he doesn’t come back up with Walsh, I’m going to have his balls,” Burke told Walsh.

After a series of tests in San Diego and later Guam, the stage was set. So on January 19 Walsh and most of his team set off in a corvette to the dive site and set about trying to find the deepest point by dropping dynamite into the ocean and timing the echoes. “We didn’t know exactly where the deepest place was: there were no maps or charts,” he says. “We didn’t care about exact depth measurement, only that 14 seconds was deeper than 12 seconds.”

At the same time a navy tug pulled the bathyscaphe towards the dive site at five knots. It arrived on dive day, January 23, in “a pretty good sea state, six or seven on the Beaufort scale.” For a craft like the Trieste, that was a challenge, but Walsh said they never considered aborting; “If we’d towed it back in, our masters in San Diego would have said: that’s it.” In fact, they did exactly that, but fortunately by the time the message reached them the Trieste had already dived. “The chief scientist put it in his pocket, walked around for a while, then sent a message back to San Diego saying ‘Trieste passing 20,000 feet’.”

Walsh and Piccard were together in the snug sphere for nine hours. “It was close. Jacques was two metres in altitude, and we had all our kit – equipment, instruments, cameras and stuff. We kind of coiled up inside it.” It got cold, too. “But, shit, it’s no more crowded than sitting back in peasant class on a trans-Pacific flight for 14 hours. You want to know about discomfort, just fly from here to Singapore.”

The Trieste began descending at 8.30 am and hit its first obstacle when it started bouncing along on the top of a thermocline at about 300 feet under. Eventually Piccard and Walsh valved off enough gasoline to break through and began sinking in earnest. It took five hours to get down.

It was dull in the main, but enlivened considerably at 31,000 feet. “We heard and felt a giant bang.” All instruments looked fine – so, despite being in a craft untested at this depth, deeper than any man had gone before, and having heard an explosion, they carried on. “We didn’t think it was OK to carry on,” retorts Walsh when challenged on this. “We knew it was OK to carry on because our readings were normal.” A pragmatist, he claims never to have been scared because the testing had been so rigorous.

The Trieste sank further and further, deeper than they had expected, until finally the loom of the lights was visible reflecting from the floor. Piccard ditched more shot to slow the descent and they made an easy landing; the gauge (wrongly, it would later turn out) read 37,800 feet. But this was to be no “giant-leap-for-mankind” moment. “We shook hands, congratulated each other and called topside on the underwater telephone, a voice modulated sonar. We told Larry Schumacher we had reached the bottom, 6,000 fathoms, and it was good.” What did he reply? “He just acknowledged. You kept your messages pretty simple.”

There, seven miles down, it became clear what the bang was: a crack across the window in the entrance hatch. Bad as that sounds, it wasn’t dangerous on the floor, since the entrance tube was always flooded during a dive, meaning the window was not a pressure boundary. It did, though, create a chance of being trapped at the surface. “If we couldn’t get out we’d be stuck in there for a few days feasting on Hershey bars.”

There is a sense of anticlimax about the bottom. No photos, since the landing had stirred up a cloud of sediment which didn’t disperse; and only 20 minutes on the bottom since they needed to surface in daylight. “It was like being in a bowl of milk. We didn’t get any pictures.” The highlight, instead, was Piccard sighting a foot-long flatfish, “like a sole or halibut”, which confounded scientists given the intense pressure on the ocean floor.

The journey back to the surface was smooth. “There was a sense of achievement. And some celebration: we worked like hell for almost a year to get to this place.” There was little carnival, though, 200 miles out at sea. “After dinner I was ready to have a nap.”

A period of celebrity followed, with a meeting with President Eisenhower; Walsh says he is “genetically not programmed for celebrity stuff” but appreciated the opportunity it gave to lobby for more support for this type of exploration. But it didn’t pay off: not long after the dive the Navy decided it was not safe to dive below 20,000 feet, so the Trieste became, and remains, a unique event.

For his part, Walsh says the motivation was not a record per se. “I was never driven to go deeper and deeper,” he says. “There was a singular goal out there and that was the deepest place in the ocean. Getting there required a systematic testing of the vehicle. Things broke, we fixed them.”

Nevertheless, down to earth though he is, there’s no escaping the frontier significance of the time. “The number of people that had piloted manned submersibles in the world you could count on one hand: it’s the days of Glenn Curtiss and the Wright Brothers when there were only two airplanes.” It’s just that perhaps when you go down instead of up, less people notice the significance of what you’ve done. “I’m writing an unauthorised autobiography,” he dead-pans. “The Right Stuff, The Wrong Direction.”

BOX 1: THE OTHER DON WALSH.

So what happened next after the Trieste program? “Well,” says Walsh, “a lot of people think I died.”

Such is the penalty for creating an historic event with so much of your life still to go. In fact, Walsh did plenty: he commanded a submarine, the Bashaw; served in both the Korean and Vietnam wars (“I think two per customer is sufficient for a lifetime”); gained three graduate degrees; worked in the Pentagon as an advisor on submarines; became the founding director of the Institute for Marine and Coastal Studies at the University of Southern California with the rank of dean (“universities are more rank-conscious than the military”); and built a successful consultancy, International Marine Inc, that continues to run from Oregon today.

But it’s the continuing exploration that sets the pulse racing, and Walsh has done plenty.

In 1971 Walsh first visited the Antarctic with the navy, as part of Project Deep Freeze, which involved inhabiting and running Antarctic stations on behalf of scientists. His efforts were so well appreciated that he has an Antarctic ridge, the Walsh Spur, named after him. “I really enjoyed it but I never thought I’d get back,” he says.

The opportunity to do so came when small expedition cruises began to grow in popularity, taking tourists to the Arctic and Antarctic; Walsh was approached to serve as an on board lecturer in the mid 90s and has now notched up 27 trips to Antarctica, 26 to the Arctic and five to the North Pole itself. Walsh (and his wife, Joan) were part of a non-stop circumnavigation of Antarctica on a Russian icebreaker in the 2002-3 season, only the 11^th time the trip has been done.

He’s also dived in the Russian Mir submersibles on the Titanic, Bismarck and the North Atlantic Ridge, something born out of many years of cooperation with Russian submariners who were once very much the enemy. “On a North pole trip on a Russian icebreaker most of the engineering staff on this nuclear powered icebreaker had come from the Soviet sub service,” he recalls. “We would sit in the bowels of the ship and drink lots of vodka and talk about our adventures; they showed me periscope photos of the US aircraft carrier Kitty Hawk they had taken from their Soviet sub.” On one trip conversation turned to the fact that nobody had ever been to the real North Pole – under the sea, 14,500 feet beneath the ice cap. A plan was hatched with Mike McDowell, the Australian founder of Quark Expeditions, to do so using the Mir submersibles and a Russian mother ship.

“We needed three things,” he recalls. “We had to get money, the front end one-time cost of about $3 million; we needed to sell tickets to about 20 tourists to come along and make a dive after the explorers had gone; and the third was to get the charters of a nuclear icebreaker and a mother ship for the submersibles.”

For years, though, only two of the three would ever come together, and the Titanic and Bismarck dives came along as commercial operations for tourists and aficionados like Titanic director Jim Cameron in the meantime. “All these were placeholders, bookmarks; the real goal was the North Pole.” And then, in 2007, came bad news: the Russian government had decided it would be an all-Russian expedition. “They came in and took all our planning and hijacked the whole thing.”

This clearly annoys Walsh but life is not so bad, living on his ranch deep in rural Oregon, surrounded by books in an office designed by his wife and apparently made up almost entirely by shelves. “Joan says that end to end they make 1,006 feet – the exact length of the Bismarck,” he says (among the many achievements of Walsh’s life is finding a wife who not only tolerates his adventures but knows to the foot how long the Bismarck is).

It’s an odd place, one might think, for a specialist in undiscovered ocean depths. “Simple,” he says. “I have bonded with my fellow man as much as I care to in this lifetime. My nearest neighbour is a mile away, I have a half mile salmon river on the far side of that pasture, and if more than half a dozen cars go by the front of the house during the day my wife complains about the heavy traffic.” Even the experimental biplane he built is up for sale in nearby Bandon. “I haven’t flown it for a while,” says the 78-year old. “I’m just too damn busy.”

“Now that I’m 78, it’s probably time to act my age,” he says. His immediate schedule – a host of engagements around Europe – doesn’t sound much like slowing down. “But in the polar regions you’re working out of the zodiac boats, helping passengers who’ve never been to these places before,” he says. “You don’t want this geriatric old fart stumbling around tripping over penguins.”

He and his wife talk about “a ritual burning of the parka, out in the yard,” to symbolise this end to the adventuring. It hasn’t yet happened. “But there’s got to be a last trip.”

BOX 2: WHY HAVEN’T WE GONE BACK?

In 50 years, the only other visitors to Challenger Deep have been remote-controlled submersibles: the Kaiko in 1995 and the Nereus in 2009.

Why have no humans gone back? Partly, it’s about money. “Science is primarily interested in data per dollar and since the 1990s ROVs [remotely operated vehicles] have proven themselves useful at trench depths,” says Peter Batson of Deep Ocean Expeditions.

“The exploratory desire is always balanced by difficulty, cost and safety,” says Captain Doug Marble in the Office of Naval Research – the division responsible for the Trieste dive 50 years ago. “Oceanographers have been able to probe the Challenger Deep by other means, such as acoustics, without going there in person.” In addition, the equation about human safety has changed since 1960. “I would guess that the intense, large scale activities of World War II and the atomic bomb prompted the realization that geophysics was ill understood for the needs of the time. Risks were undertaken [by humans] which today would be ceded to remote and autonomous systems for the initial steps.”

Then there’s engineering. Batson says: “The deepest trenches are about 11 kilometres deep, but cover only 2% of the ocean floor. So if you can build a manned submersible that can go six kilometers down, you’ve got access to 98% of the world’s sea floor.” This has influenced the design specifications of later manned submersibles, such as Japan’s Shinkai 6500, which can go to 6.5 kilometres. “Trieste’s deep-diving abilities came at a cost – it was huge compared to modern submersibles and was logistically difficult to operate,” Batson says. Instead it will be endeavour that takes us back: hence the most likely man to repeat Walsh’s feat is currently Jim Cameron.

Walsh is, if not bitter, then disappointed by the way things have gone and one senses a certain antagonism both about the US’s failure to keep pace with manned submersible technology, and with disproportionate spending on space exploration. Asked about the context of the 60s, when the space race was developing in earnest and Joe Kittinger was setting a high dive leap from a hot air balloon at the edge of space that still stands today, he prefers to highlight the achievements of submariners at the time: the Nautilus going across the Arctic Ocean under the ice cap by way of the North Pole; the Triton circumnavigating the world totally submerged. “When I met President Eisenhower I realized that he had only given personal decorations to three military persons in eight years,” Walsh says: himself, Bill Anderson of the Nautilus and Ned Beach of the Triton. “They were all submariners.”

“There is a lack of investment in studying the ocean compared to space,” says Walsh. “But we live here on this manned spacecraft called Planet Earth. Few of us are going into space. It’s entertaining, and certainly the son et lumiere of a space launch is formidable. What we do, one minute it’s there, the next minute it’s a cloud of bubbles. It’s not very exciting. But it’s very important.”

Australian Financial Review, February 2 2010

When Anwar Ibrahim walks into the Kuala Lumpur High Court today, he will at least know what to expect.

Anwar, Malaysia’s one-time deputy prime minister and now the de facto leader of the first credible opposition in Malaysia’s independent history, is facing the third incarceration of his life. The first was a 22-month detention when a student leader in the 1970s; the second a six-year stint in 1998 for sodomy (overturned in 2004) and corruption, during the administration of his one-time mentor, Mahathir Mohamed. Now, he faces another sodomy charge, and the potential of 20 years in jail. Locally the press are calling it Sodomy II, like a sequel. “They use the same script,” he tells the AFR in an interview in his Kuala Lumpur offices. “I’ll leave it to the lawyers. I don’t have any trust in the system.”

That’s no surprise. Anwar’s trial represents an enormously significant moment for Malaysia, because it could make or break the opposition movement at a time of intense racial tension on a scale the country hasn’t seen since the race riots of the 1960s. Malaysia, though a sometimes uneasy patchwork of a Muslim Malay majority and significant Chinese and Indian minorities, has for decades been amongst the most moderate and peaceful of Muslim nations. Yet in recent months it has become a place where churches are firebombed over the right for Christians to use the word Allah, and where cows’ heads are kicked around outside Hindu temples.

Some feel these forces have been inflamed by the country’s UMNO party, the leader of the ruling Barisan Nasional coalition, seeking to secure its hold on the Malay vote; Anwar calls it “desperate measures to frustrate this peaceful transition.” But at the same time Anwar’s own rise, with his multi-racial coalition securing one third of the votes and five out of 13 states in landmark elections in 2008, has become something of a catalyst for this expression of tension. “Yes, of course that is true,” he says. “You can see the press, controlled by UMNO, blaming me for causing this, for giving courage to non-Malays to express themselves. But I think the contrary: we are giving that right of expression to all. There is a new generation of Malays who are asserting themselves with greater confidence.”

Another jail term for Anwar could do one of two things. It could wreck his coalition, which despite its outstanding 2008 performance has widely been viewed as fragile: it unites a party formed by Anwar’s wife, Wan Azizah Ismail (who is still officially its president), during Anwar’s 1998 jail term, with a sometimes hard-line Islamic party and another whose key constituency is overseas Chinese. Lacking a charismatic leader to glue it together, the alliance could fail well before the next elections, due in 2013, although Anwar insists detailed contingency plans are in place among the three parties. “There is already an agreement what to do in the event – the unlikely event – I am convicted, yet again. The coalition will stay with or without Anwar.”

Alternatively, another conviction could unite opposition behind a cause and give it renewed momentum. It is also not likely to go down well overseas, where doubts over Anwar’s earlier conviction are already widespread; public figures who have already voiced their concern for him range from Al Gore to US Supreme Court Justice Sandra Day O’Connor and, right up to his death, former Indonesian president Abdurrahman Wahid.

The uncertainty is not helping Malaysia, where foreign direct investment numbers are flagging even after accounting for recession: from M$62.8 billion in 2008 to M$12.6 billion in the first nine months of 2009. “Foreign investors are asking me about Anwar and the firebombings all the time,” says one foreign banker in Kuala Lumpur who deals with major foreign investors. “If Anwar ends up back in the slammer it’s going to have major negative consequences on Malaysia. Whether or not it will mean riots on the streets I don’t know, but it will certainly harm the government.”

Anwar is an appropriate figurehead for his country’s painful change. It’s easy to forget it now, but he was once the chosen one to succeed Mahathir: he was deputy leader and finance minister through the Asian financial crisis and was trusted so implicitly he was made acting prime minister for two months in 1997 when Mahathir took a holiday. But he wanted reform in governance and institutions, and when he started linking Mahathir with improper contracts and bailouts for family members and cronies, his time in the sun came quickly and brutally to an end. His 1998 trial raised concerns worldwide; Amnesty International considered him a prisoner of conscience, and the injuries incurred in jail cause him back pain to this day.

Because Anwar’s corruption conviction was never overturned, he was banned from politics until April 2008, and took to teaching in the US. Malaysia’s then prime minister, Abdullah Badawi, timed the 2008 elections to be just one month before Anwar’s ban expired, fearing his popular voice, but it didn’t work: Anwar simply canvassed for his wife’s party, and when his ban expired she surrendered her seat and he won it in a by-election. For a time his momentum seemed unstoppable: by September 2008 he was claiming to have secured 30 parliamentary defections that would give his coalition a majority. He demanded a vote of no confidence.

But then things stalled. First, he couldn’t force that vote, and he says he couldn’t expect his converts to declare openly until the moment of truth on the parliament floor – consequently, there’s no proof that he ever had the numbers at all. “In any democratic country we would have taken over by now, because we had the numbers, but there’s no way to go about it,” he says. “In this climate of fear and repression you can’t expect people to declare openly now except for the critical moment when the motion is tabled.” By this he is referring to the string of opposition figures, including a number of state leaders, who have been comprehensively investigated by federal institutions since the election.

Momentum was further derailed when in June 2008 a new sodomy charge, from a young aide called Saiful Bukhari Azlan, appeared with a convenience of timing that many have found deeply troubling: the taint of sodomy, illegal in this Muslim country, is considered a death knell to an aspiring politician. Whether people believe the charge or not, defending it has been time-consuming and helped to take the wind out of the challenge’s sails. And many events in the build-up to the case – the team of commandos sent to arrest him when he was on his way to the police station to make a statement, the dispute over whether the prosecution should have to let the defence see evidence prior to the trial, confirmation that Saiful visited current prime minister Najib Razak’s residence days before filing his police report – seem to bode badly for him.

But while Anwar is under pressure in the court, it’s the incumbent government, and in particular the UMNO party at its heart, that is struggling, and not just with those election results. Even in a country with a largely compliant mainstream press (but a vibrant alternative media), the government and the country’s other key institutions have found themselves mired in scandal: the death of opposition political aide Teo Beng Hock, who fell from a 14^th floor window during questioning by the Malaysian Anti-Corruption Commission (MACC). There’s the murder of the Mongolian model Altantuya Shaariibuu, the mistress of Najib’s foreign policy advisor, who prosecutors claim was killed by government commandos in 2006 and whose body was destroyed by C4 explosives. There have been scandals over contracts for French submarines, jet engines that have gone missing, and a dispute over the legitimacy of a state government in Perak.

And most recently, a court case regarding the use of word Allah by non-Muslims has flared up. In December the High Court, in dealing with a long-standing dispute between the government and the Catholic Herald newspaper, ruled that the government had no power to prohibit the use of the word Allah or to make it the exclusive preserve of Muslims. Numerous acts of arson on Christian churches have followed the ruling, while the original debate has become a somewhat farcical exercise in semantics, with the government – which, incidentally, is in the middle of a major public relations tilt called One Malaysia aimed at promoting racial and religious unity – ruling that Christians in East Malaysia can use the word Allah when speaking Malay, but that those in West Malaysia cannot.

Many of Kuala Lumpur’s business community are increasingly alarmed. “You see Najib on one hand talking about One Malaysia and a multi-racial tolerant country, and on the other you see the complete opposite of that driven by the establishment,” says a banker, who like all commercial figures in this article wished not to be named for fear of damaging relationships with government. “This may sound over the top but I would describe Malaysia as almost anarchy at the moment, because all the institutions of government believe that their job in life is to restore BN back to its previous power. The judiciary believes its job is to prosecute the opposition. The police: that their mission is to prosecute the opposition. MACC, the same. The guys in power are stoking racial unrest because they believe it’s one way of supporting the Malay vote.”

Anwar – who took some strident positions on Islam himself in his youth – has sought to preach a less radical middle ground. “I have asked the world’s most renowned authorities on Islam and nobody, not one, disputes the fact that Allah can be used by anyone,” he says. “It’s been a non-issue for 1,400 years among the Muslims.” Even PAS, the Islamic party in Anwar’s coalition, normally known as the voice of those with a more traditional and inflexible view of Islam, has publicly said they have no problem with Christians using the word: the fact that the purely Islamic party is now on more moderate ground than the government has cemented a feeling that the government has been playing the race card to try to win back disgruntled Malay voters.

The government has not been blind to change and has taken some reformist measures itself. The most significant concern the New Economic Policy, the measures enacted in the 1960s – by Najib’s father – in support of the local Bumiputra (“sons of the soil”, or Malay) population. It guaranteed them, among other things, a certain proportion of civil service jobs, and a minimum share of any stock market float. While understandable in the context of its time, many, Malays included, have come to see it as a crutch that has become a hindrance, damaging competitiveness and breeding complacency. Late last year Najib began some modest repeals.

So does Anwar believe change can be effected peacefully in Malaysia? “Well for the first phase, the five states [in the March 2008 elections], it did,” Anwar says. And despite doubts about his coalition’s durability, he argues its very cross-faith existence is enormously positive. “It means that in Malaysia, if political leaders don’t continue to incite hatred and use the race card in politics, we can survive,” he says. “The problem is UMNO: they have become an obsolete party of the past.”

But Anwar is not a Mandela and will never quite be embraced in that way. For a start, there is the fact that, having started out a somewhat radical student and youth leader, he switched allegiances to Mahathir in the 1980s and made his name soaring through the ranks of the party he now dismisses as “the last refuge of scoundrels”. He argues that when he joined Mahathir in 1981 he did so because the leader was talking about reform, and that through much of the 1980s they were effective; it was when a more authoritarian style came into effect that he objected, at great personal cost. “But can I absolve myself from the entire policy, decisions, excesses? No I cannot. I have made that very clear to the people.” Did he ever engage in the money politics commonplace in UMNO at that time? “When I announced my candidature (as deputy leader) 80% of the UMNO cabinet members, all chief ministers, were with me. So I didn’t need to go beyond that. The culture on the ground, you have big fees, but nothing compared with this cash being paid [in UMNO now].”

Additionally, some accuse him of opportunism in his career, and of inconsistency: a chameleon quality (he uses the word himself), saying what the audience of the moment want to hear, which raises questions about how he would fare in office when there can be only one decision for all audiences. Some say he is disorganised too, and unable to give his closest staff a clear mandate. “He is a great politician inasmuch as his oratory skills are fantastic, and he can definitely speak to a crowd,” says one observer. “But he can’t administer and he can’t organise.” Another stresses that “what happened in the election was a vote against government, not a vote in favour of the opposition.” On top of that mainstream media is unlikely to take his side, though the advent of Twitter, Facebook and blogs have helped dramatically, and it is noticeable how much stronger his support in well-connected and tech-savvy urban areas is than in rural Malaysia.

Listening to him in English, fluent but understated and sometimes a little unclear, one wonders how the chameleon projects to the heartland.

The answer comes later that night at a rally in a community hall in the Kuala Lumpur suburb of Cheras. Here, in the local Malay language of Bahasa, the delivery is utterly different, voice playing the ranges from aggression to a whisper, arms expressively aloft, the audience by turns brought to laughter, indignation and applause.

For sure, this is a home team crowd, but it’s largely a Malay Muslim crowd, supposedly the very core of UMNO’s appeal, and they are packed 50 deep outside the hall exits, arms folded, listening intently. Some have brought their children, drooping flopped on shoulders; it is 11.45pm on a Thursday night.

He will do the same on alternate nights leading up the trial, campaigning steadily when an election could still be years away. Over noodles with his chief ministers and supporters, well past midnight, he tells the AFR about the forthcoming weekend rallies where he expects crowds far greater than the 1,000 or so who turned up tonight.

It’s no surprise he looks tired. Earlier the AFR had thanked him for his time, remarking how busy he must be. “Not busy,” he says. “Under siege.”

 Click below for a PDF of the story as it ran

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Euromoney, September 2009

IF MACQUARIE GROUP is at a crossroads, it probably already owns it. The financial services group, best known outside Australia for its infrastructure investments from Sydney Airport to the M6 motorway in the UK, has had a difficult year and has seen one part of its model – the satellite fund – run into trouble. It has faced belligerent hedge funds intent on bringing down the stock, and indeed the bank; it has taken billions of dollars of impairment charges on its listed funds; and it has faced a certain local Schadenfreude in a country that shows little warmth for tall poppies. But as imitators have gone bankrupt it has stayed profitable throughout and is already tweaking, evolving and reinventing, just as it has ever since it started out in 1969.

“In the time I’ve been covering the stock it’s gone from market-making equity options to gold bullion trading, to R&D tax financing to cross-border structured financing to listed infrastructure,” says Brian Johnson, one of Australia’s most highly rated banking analysts, who recently moved from JPMorgan to CLSA. “The model just continues to evolve.”

It has been common in the past 18 months to talk about the Macquarie model, and to ask if that model is broken. Typically, when people use this term, they are referring to an approach that Macquarie pioneered: buy infrastructure assets, put them into funds, gear them and then list them, with the parent drawing base and performance fees for the management of the funds.

This has unquestionably been big business for Macquarie – it has 14 listed real estate or infrastructure funds or fund managers listed in Sydney, Singapore, Tokyo, New York and Seoul, with A$11 billion ($9.1 billion) equity under management between them even after market declines, but the bank has lately been at pains to point out that in terms of the overall business it’s not that big a deal. In the year to March 31, specialized funds accounted for just 13% of Macquarie’s A$7.6 billion in operating income – ranking just fourth as a source of revenue behind such areas as lending and leasing, commodities and FX, and cash equities. That is partly a consequence of declining values and performance but this business’s contribution has never been higher than 20%. 

“That includes all the income from specialist funds, M&A fees, advisory fees, underwriting fees – everything to do with those funds,” says Nicholas Moore, chief executive. So is Macquarie misunderstood? “Well it’s certainly an important point to make,” Moore says. “Because our [funds] business is so strong people will naturally recognize that. They might not recognize the other 87% of the group.” And even that overstates the contribution, he says. “Of that 13% we estimate the listed portion is less than 5%. The group is more than 95% non-listed funds.”

It’s natural, though, that this has captured the most attention, and Macquarie was much more vocal about this point of differentiation when the model was working well. People get attached to infrastructure because they can see it, be it the motorway they drive on to get to work or the airport they fly out of. Once you start exposing retail share investors to these assets, that visibility increases dramatically – particularly when things are not going well. And, lately, they haven’t been.

Things were fine in an era of cheap debt and a ready acceptance of leverage, and investors in many satellite funds have done very well out of them over the years. However, the approach fell drastically out of favour as sentiment towards indebtedness changed. Some listed funds, such as Singapore-listed Macquarie International Infrastructure Fund, are trading at around one-third of their listing price. At a group level, the full-year result to March 2009 included A$2.54 billion of provisions, one-off costs and equity losses, some of it from one-time hits such as the group’s exit from Italian mortgages and for modest ABS or CLO exposures, but mainly for the funds, real estate and resources equity investments, and co-investments in infrastructure such as Japan Airports and Spirit Finance.

In the event, these impairments weren’t even enough to put the bank into the red: its A$871 million profit for the 2009 financial year was down 52% on 2008 but still mocks the multi-billion dollar losses of many banks in Europe and the US. But the era of those listed funds is over, at least for now.

The final straw from the retail investor perspective was Brisconnections, set up by a Macquarie-led consortium to design, build, operate and finance an A$4.9 billion airport toll road in Brisbane. BrisConnections was floated in July 2008 using an installment model: investors were to pay A$1 up front, with two more A$1 payments to come in subsequent installments, to make a A$1.2 billion flotation, which Macquarie also underwrote (with Deutsche). By November it had reached the lowest possible price on the Australian Securities Exchange, one tenth of an Australian cent, with investors still on the hook for two installments each 1,000 times higher than the trading value of the stock. (See Euromoney June 2009, page xx for more on this; most investors have since taken up a Macquarie offer to give up their shares for nothing in exchange for being excused payment of the next two installments.) Moore points out the road will still be built on schedule, but clearly the brand damage to Macquarie and listed infrastructure was severe. Broadly, many feel that Macquarie’s involvement in listed funds as both a manager and as the recipient of fees from that fund based in part on scale and transactions is a conflict of interest. Moore responds: “It’s pretty clear the governance structures are designed to ensure that’s not the case.”

Asked if that model is gone for good, Moore speaks of “the frustration we feel and our investors feel” that the good assets in the funds are not reflected by the listed markets. He adds: “Needless to say, whether it’s Macquarie or anybody else, there’s no capital going into listed funds to buy infrastructure assets today because they’re just not valued by the listed market. Will that turn around? Sure… but where we sit today, plainly there is frustration.”

And so a shift is under way: Macquarie is stepping away from listed funds (see box) and moving more and more into unlisted. The net effect is that Macquarie is going to remain every bit as active in infrastructure as it always has been, and indeed already the equity under management in the unlisted funds (including real estate), at A$41 billion, is almost four times the amount in listed vehicles.

And it’s growing fast. In August Macquarie signed a deal to put $50 million into a $530 million infrastructure fund with Vnesheconombank, Russia’s state development bank, to capitalize on Russian government promotion of private sector activity. This followed the April launch of a $1.04 billion Indian infrastructure fund with State Bank of India, in which Macquarie committed $150 million. Next up will be a joint venture with China Everbright to raise $1.5 billion for investment in North Asia infrastructure projects.

Clearly Macquarie still has to make these vehicles work but doing it this way has a lot to recommend it. Stock market investors, particularly retail ones, tend to be skittish, and also want a dividend yield, which in the good times was generated by re-gearing the assets in the funds but is impracticable now. “In the unlisted model, you’ve still got governments selling assets, but you’ve got wholesale pension funds that want to buy long-duration assets to match their liabilities,” says Johnson. “They don’t need the illusion of a distribution of the capital value. They are more worried about the long-term value of the asset. To me the unlisted model looks a lot more sustainable.”

Chief financial officer Greg Ward says: “I like unlisted funds. Retail is hard, you’re dealing with exchanges and mass investor communications – it’s quite a process. In unlisted you can sit around a table with the investment committee… you put it all together and it’s done.” Moore depicts the decision between listed and unlisted models as “a market driven issue – it’s not a call we’re making, we’re just reflecting what’s happening in the broader marketplace”.

A big question with this shift is what happens to the fee structures, which have long been a keystone of the bank’s investment banking division. There have been years in which as much as half of Macquarie’s overall M&A transaction count has featured a party with a Macquarie link. Ward says the fees are “about the same” in the listed and unlisted models, although clearly the bank will lose its underwriting fees on the flotations that will no longer occur. Johnson feels that this area is “where the jury is still out” but thinks the fees will end up being similar, just pushed further back in the fund’s process. Macquarie should hope so, as the investment banking arm is the one part of the business that was still declining in the first quarter of the 2010 financial year compared with the fourth of 2009.

But, if Macquarie is not just funds and infrastructure, what is it? Crucial to understanding Macquarie is a comprehension of its style of business. Allan Moss, Moore’s predecessor as chief executive, used to talk of the “loose-tight” approach to risk management; within certain parameters, if someone comes up with a good idea, they are pretty much given the keys to go and make it work. Moore too talks about “this entrepreneurial nature, making sure the initiative and the enterprise is really owned at the grass roots. These are the people who are going to see the opportunities and are going out into the marketplace, so we are going to create an environment that is supportive of them.”

The consequence of this is a business that can appear bitty, with siloed businesses apparently running in isolation from one another. “My two biggest competitors in the industry when I was there were other parts of Macquarie,” recalls a former employee. But it is extraordinarily wide-ranging in both a business and a geographical sense. Some 40% of its 2009 operating income came from businesses that did not exist five years ago, and a look at developments in the securities business, one of five key divisions within the bank’s structure, over that period illustrates how it happens. There was the Asian cash equities business, the old Baring franchise bought from ING Asia in 2004; the launch of a cash equities business in India; a joint venture with First South Securities in South Africa; the acquisition of Orion Securities in Canada in 2007; greenfield businesses in Europe and the US, the establishment of a European structured equity finance team, and a synthetic products business. Other divisions, including treasury and commodities, corporate and asset finance, banking and financial services, and funds, look the same: incremental shifts into tightly defined new areas, almost franchises.

If we accept that Macquarie is through the worst, where next? Following its A$1.2 billion share capital raising in May, it has A$4.3 billion above minimum regulatory requirements. Although that has clearly been highly useful as a buffer and a source of security for investors, it will soon become a drain on return on equity (which, incidentally, has an unusual side effect at Macquarie since the calculation of its bonus pool is directly linked to ROE). “The drag of capital will become a big issue over the next 12 months,” says Deutsche bank analyst James Freeman, “and they are going to want to use it sooner rather than later.”

This ties in to a nagging fear that, in demonstrating its stability, Macquarie might have neutered some of the outside-the-box entrepreneurship that made its name. “When I look at Nicholas going from Macquarie Capital [the investment banking and specialist funds arm, which Moore built] to CEO, he goes from being the entrepreneur to being the risk rationer and that must be hard for him,” says a person who has worked with him. And Moore’s unavoidable change of focus, a function of promotion and market environment, is perhaps emblematic of a necessary group-wide shift in attitude from brassiness to caution. The use of that surplus cash will say a lot about the group’s confidence and boldness as the financial crisis eases. (Five days after the interview as Euromoney went to press, Macquarie announced a US$428 million acquisition of Delaware Investments, a US money manager, in the largest foreign acquisition the group has yet announced. Perhaps rumours of lost gumption were premature.)

When will it be deployed? “That’s the sort of dilemma or debate we have internally,” says Ward, who thinks that the 2011 financial year – which starts for Macquarie in April 2010 – is the time when “there will be a bit more attention to the traditional metrics of return on equity” and therefore banks will be expected to put excess capital to work.

Macquarie historically has never gone anywhere near its regulatory capital minimums – at March 31, before the share capital raising, its tier 1 figure was 11.4% compared with a 7% minimum – so not all of that excess capital is deployable, although Ward says “if the minimum held was a billion over or a billion and a half I think that would be more than ample.” On that methodology about A$3 billion is available to be put to work.

Asked where it might go and when, Moore’s detailed response covers every area of the business and pretty much the world, from US debt capital markets to Australian and global fund management, corporate and asset finance lending, leasing, and domestic retail banking, but what’s lacking from it is any sense of a visionary or transforming acquisition or a major deployment of funds. “We’ve always had a relatively small and expensive balance sheet and we’ve always been very cautious in the use of it,” says Moore, stressing the bank’s role as a provider of services more than a lender of capital. “We don’t see the role of the organization to be taking the last basis point of use out of the balance sheet.”

If one were to identify the acquisition that comes closest to transformative in the past five years, it would probably be the ING Asia brokerage business, which brought more than 400 people into the fold – yet that deal’s cost was so low that it has never been disclosed, meaning it didn’t even meet the Australian Securities Exchange’s definition of a material transaction. This can seem at odds with the bank’s recent history of landmark bids for, for example, the London Stock Exchange and Qantas, but those (neither of them successful) were mooted investments in which Macquarie would actually not have put much of its own capital on the line. Macquarie does get linked with specific businesses – such as Fox-Pitt Kelton and ING’s Asian wealth management arm – but it is never likely to turn up buying an entire continent of Lehman staff like Nomura, for example. Moore says that the deployment of capital is typically for organic growth rather than big deals.

At times this can be a difficult business to get a sense of direction from. “What’s the model going to be?” asks Freeman. “It seems a collection of businesses trying to make money but with no overarching strategy. I’d characterize it as being in limbo: surplus liquidity awaiting a defined strategy.”

Still, there is a common theme to the modest acquisitions of the past 12 months: energy. In May it bought Tristone Capital Global, an energy advisory and capital markets business based in Canada, for C$116 million ($106 million); this followed, in February, the purchase of Constellation Energy’s downstream natural gas trading operations in Houston, and the earlier development of a gas trading business called Macquarie Cook Energy. Between them, the three have quietly made Macquarie one of the leading players in North America’s wholesale natural gas market.

Johnson in particular thinks this is the next big step for Macquarie. “I can see the next wave of the business model beyond the unlisted funds, which is oil and gas,” he says. “That’s certainly the space Macquarie is moving into. The evolution continues.”

BOX: GETTING OUT

Macquarie’s departures from its listed funds are happening in a variety of ways. One key deal came when Macquarie sold its Macquarie Communications Infrastructure Group – which contains the communications assets Broadcast Australia, Arqiva and Airwave – to the Canada Pension Plan Investment Board for A$3 a share shortly after fund itself was trading at 83 cents. Moore sees this as vindication of his view that the underlying assets in the funds are far better than the listed markets think they are. Other trusts have been selling assets to raise cash or retire debt, notably the Macquarie Countrywide Reit and Macquarie Infrastructure Group (which sold a 25% stake in the Westlink M7 motorway in February), while Macquarie’s 26% stake in the Singapore-listed Macquarie Prime Reit was sold outright to YTL. A co-investment vehicle called Macquarie Capital Alliance Group was taken private in August 2008, and others may follow.

Increasingly, though, Macquarie is keeping its stakes in the funds but backing out of their management completely. This has been put to shareholders in two trusts – Macquarie Leisure, which owns theme parks; and Macquarie Airports, which with a A$4.1 billion ($3.4 billion) market capitalization is one of the biggest funds (and the most visible, since it owns most of Sydney Airport). Macquarie Infrastructure Group, the other heavyweight listed fund, is also believed to be considering going it alone without the parent  – and may also be split into two vehicles.

The airport deal is controversial as Macquarie is surrendering its management rights at a cost: stock worth A$345 million at the time of the deal. The mechanics of calculating that figure – what’s the right to management worth? – are unclear and some shareholders plan to vote against the proposal, with Perpetual Investments believed to be among the big managers grumbling about the circumstances of Macquarie’s exit. Some think there should be no payment at all “It remains difficult for us to shake the feeling MAP has overpaid to sever the relationship,” wrote JPMorgan analyst Kirsty Mackay-Fisher in a note entitled: “MAP lays one last golden egg before flying the coop.”

While it’s not strictly fair to say Macquarie is cutting trusts adrift – if the deal goes through its stake in Macquarie Airports will actually increase – there is clearly a reputational issue if Macquarie trusts, granted independence from the mother ship, then get into trouble. That, surely, would make the listed model difficult to return to should Macquarie ever feel the need. CFO Greg Ward says he has never felt any of the satellite funds have had problems with gearing.

BOX

How close did Macquarie get to the edge?

As Lehman went under and Merrill Lynch lost its independence last year, attention turned to investment banks across the world. What of the pretender from the Southern Hemisphere?

At first glance there were plenty of reasons to wonder about Macquarie. There were widespread questions about leverage in the funds model, the strain impairments in those funds might cause on the parent, and the fact that two Australian groups that imitated that model, Babcock & Brown and Allco, both went bankrupt. The market clearly had its doubts – the stock fell from more than A$80 to A$15.50 in a little over a year from early 2008 to March 2009. But perhaps more ominously, credit default swaps blew out alarmingly: to 1,800 basis points on its subordinated debt in October, compared with a 200bp to 400bp range over the previous six months.

Logically there shouldn’t have been any cause for alarm, because of Macquarie’s capital position. Greg Ward, chief financial officer, says that Macquarie had been selling off lower-yielding assets such as margin lending and Italian mortgages through early 2008, realizing about A$15 billion ($12.5 billion), “basically to have in place the funding should we not be able to issue for an extended period of time”. Ward says that by the time of Lehman’s collapse Macquarie held a cash balance A$7.4 billion greater than all its short-term wholesale debt, enabling it to repay its commercial paper in full, while maturing longer term debt typically stands at A$3 billion to A$4 billion a year, so was well covered. “We’re not funding short and lending long like a traditional bank, we’ve been match funding,” says Ward. “That’s one of the reasons we didn’t have a problem – plus of course we didn’t have the principal positions [of Lehman] because we’re client driven, not a punting shop.” Additionally, it had built up the retail deposits in the bank, an area little remarked upon but by March worth A$18.8 billion, or 25% of the funding base.

Although some in the market say that Australia’s government guarantee on bank debt issuance was put in place because of mounting concerns about Macquarie and Suncorp, Ward is adamant “we’ve never needed the guarantee. The whole industry needed the guarantee but Macquarie back in March 2008 was unlike any other bank because of this match-funded balance sheet. If we had done no more borrowing in the last year, no more debt issuance, we’d still have more cash now than we had a year ago.”

But can fear bring down solid institutions? If counterparties had believed what those CDS spreads were implying they would have stopped doing business with Macquarie altogether. “We didn’t do any issuance at anything like what the CDS was suggesting,” Ward says. “Our major counterparties could see this was not real. The default risk when you’ve got more cash than borrowings is not real. But no one wanted to believe that at that point of time. It was: Lehman’s has gone, Bear’s has gone, in this market Babcock and Allco have gone, why aren’t you next?”

CDS, Ward says, are “obviously not a regulated market”. He recalls: “there would be three brokers or something that would seem to quote the whole market – they would talk about volumes per day of $2 million to $5 million and the thing would move 50 basis points on nothing.”

Some groups were working hard to hit Macquarie’s share price and CDS spreads with false rumours, a practice that prompted a stern and unusual statement from the Australian Securities & Investments Commission (which banned short-selling for eight months up to May). Around this time analysts and fund managers began to distance themselves from what was happening. Charlie Aitken, from Southern Cross Equities, previously a vocal critic of the Macquarie model, wrote to his clients in September: “I do not want to be even a peripheral part of a sinister campaign of Chinese whispers and manipulation to bring down a great Australian institution. It’s just not right.” Stephen Mayne, a renowned gadfly and shareholder activist usually tough on Macquarie, ran the letter in his widely read Mayne Report blog. A curious change of tone was taking place: Macquarie, often portrayed in the vigorous domestic press as a cold-hearted millionaires factory willing to go to any lengths for the last buck, was emerging from a “serves-them-right” attitude in press and population as concern grew about market manipulation.

For his part, did Moore ever perceive a threat to Macquarie’s sustainability as an independent entity? “No,” he says. “There was certainly a threat to our profitability… but there has never been a challenge to the underlying strength of the balance sheet.” He adds: “Worst case, if the world had actually stopped, we would have just run down the assets as they matured and run down the liabilities as they matured. Plainly, profitability would have been painful, but certainly it wouldn’t have impacted on the survivability or the existence of the organization.”