The modern investment banking industry had its start in the mid-19th century with the purpose of locating and providing capital to fund heavy industry, mining and railroads; particularly in the US. Many names from this period are still familiar including Goldman Sachs Group Inc (NYSE: GS), Morgan Stanley (NYSE: MS) and what is now known as UBS.
By comparison Macquarie Group Ltd (ASX: MQG) started in 1970 with a total of three staff. It now has 13,900 people and offices in 28 countries; making Macquarie one of the great success stories. Not bad so far, but what of the future? Investment banking is a highly competitive business and smaller participants have to develop specialist areas of expertise in order to prosper. Here are the three operational segments where Macquarie Group continues to develop scale, sustainable advantages and genuine growth prospects.
Infrastructure & Real Assets
Macquarie is the global leader in managing infrastructure assets and is well ahead of rivals. This scale allows it to be competitive in this space and the outlook is very positive for infrastructure investments, especially in North America, Europe and Asia. Clients include global pension and superannuation funds, institutional investors and governments. Other areas of expertise include agriculture, real estate and alternative assets.
South Korea
Following the acquisition of ING's asset management business Macquarie is now the largest foreign asset owner in South Korea and the seventh largest in the country. Macquarie continues to work closely with the National Pension Service which itself has $320b under management. Much patience and foresight has been put into developing the South Korean business and it is a textbook example of how to do business in Asia. With an economy twice the size of Australia and a positive outlook South Korea is a very attractive place to be doing business. Strangely Australia and New Zealand Banking Group (ASX: ANZ) is the only other major Australian financial institution with any representation in South Korea.
Resources & Commodities Trading
Macquarie is actively looking to build scale in commodity trading. It is presently the fourth largest physical gas marketeer in North America, and has bought into metals warehousing in the UK. In addition, Macquarie has a well-regarded research expertise in resources. If scale can be achieved at a reasonable price this division should become a strong profit centre for the group.
As well as the above, Macquarie undertakes a host of other activities and has a leading role in domestic mergers & acquisitions. With 68% of operating income derived offshore, Macquarie presents a unique opportunity to purchase a home-grown global financial services business.
Foolish takeaway
At $54.50 Macquarie Group is selling at a 2014 price-earnings ratio of 16 and a 5% partly franked dividend. In my view this understates the value embedded in the business, especially if the high proportion of offshore earnings is considered. Macquarie remains a quality buy.
