Buried in the ground, far out of sight, exists a sprawling web of copper and steel pipes that are integral to keeping homes across the world running smoothly.

Whether they are filling British taps with water, transporting gas across the southern US or acting as underground broadband ducts beneath remote parts of Spain, the common denominator is likely to be Macquarie, the Australian financial services company that has become quietly ubiquitous in global infrastructure.

Macquarie’s rise from a far-flung, three-person operation in the 1960s to the largest infrastructure asset manager in the world is a remarkable one. Overall, it has $590bn assets under management and is also a global commodities trading giant, a leading corporate adviser on mergers and acquisitions — and a rapidly growing player in Australia’s powerful retail banking industry.

With such outsized success has come increased scrutiny of an enigmatic company that would prefer to downplay its influence.

As Macquarie has grown in stature, the company has been derisively nicknamed the “Vampire Kangaroo” — an Antipodean twist on the infamous name given to imperious investment bank Goldman Sachs — because of its reputation for buying essential public infrastructure, increasing its debt and paying out handsome sums to shareholders. This lucrative strategy, first pioneered in the 1990s, became so popular it got its own name: the Macquarie model.



Now, decades after governments first started to sell off crucial public assets, the robust financial health of Macquarie and its peers contrasts starkly with the standing of indebted utilities that many believe are failing to meet the needs of growing populations. This has led critics — even some inside the industry — to question whether using private finance in essential state monopolies is in the public interest.

It has become especially controversial in the UK, where Macquarie’s decades-long history of investments in the country’s large private water monopolies has dragged its name into growing public outrage over pollution and sewage in rivers and coastal waters.

“We have in the past 30 years been handing many of our crucial infrastructure assets to private investors, while the risks remain with the public,” says Peter Folkman, a former council member of the British Private Equity and Venture Capital Association who teaches at Alliance Manchester Business School.

“Macquarie was one of the first to realise how the steady and predictable cash flows from infrastructure investments could be levered to produce very attractive returns to equity investors,” he says. “But as a public policy, it’s questionable.”

A well-honed playbook

Named after the British army officer credited with transforming what was then the penal colony of New South Wales into a free settlement, Macquarie evolved into a global behemoth valued at A$71bn ($48bn) thanks in part to its flagship infrastructure financing model. 

Macquarie stepped in as governments privatised assets to shift debts off their balance sheets and turned to private capital to raise finance for new projects. In the process, it helped transform infrastructure into an asset class, a tradable financial product, highly attractive to investors.

“If you don’t attract private sector investors, the state has to do it all,” says Simon Montague of the Global Infrastructure Investor Association. “Bill-payers or taxpayers will ultimately be funding investment, whoever raises the finance.”

Today, Macquarie’s investment portfolio includes everything from toll roads and car parks, to airports, ports and aircraft, bridges and battery storage, solar and wind farms, fibre networks and data centres, hospitals and specialist disability homes.

Its supporters credit the company with creating a framework that has drawn much-needed finance to the structures and facilities that keep society ticking — and, most recently, government-backed renewables, including the nascent hydrogen, bioenergy and carbon capture markets.



The UK was among the countries that embraced the privatisation of critical infrastructure most enthusiastically, particularly with regard to essential monopolies such as water.

“People like owning essential monopolies because, in the absence of close regulation, they can extract high profits,” says Jon Moulton, a private equity veteran and founder of Better Capital. “Given that no one wants to suffer the potentially ugly consequences of a bankruptcy . . . regulators [which set the amount the monopolies can charge customers] normally allow prices to rise so that the risk of having high debt levels is very low for investors.”

As governments opened up to the idea of transferring public assets into private hands, Macquarie’s investments fanned out across the world, such as the Chicago Skyway toll bridge in 2004. At the time, it was the largest infrastructure privatisation deal in US history and the first time one of the country’s toll roads passed into private operation.

By that point, Macquarie had developed a well-honed playbook: it uses a standard private equity model, which creates infrastructure funds by raising cash from large-scale investors, such as pension and investment groups.

These provide the equity portion of the funding used to buy a particular asset, such as a water or power company, a road, or gas or telecoms network, for example. The balance is then borrowed from the large global banks or private debt funds.



Macquarie’s income, as the manager of the funds invested in various assets, comes from management and performance fees tied to the fund’s returns. After acquisition, the stable cash flows generated by the asset provide the security for further borrowing, allowing Macquarie to significantly increase the indebtedness of the acquired company.

This provides funding which can either be used to invest in the business or to enhance investor returns through dividend payments and early repayment of the loans made by investors as part of the initial deal.

Folkman, who is himself a private equity investor, points out the risk: “Given the incentives and investor objectives they choose to take the money out rather than reinvesting in the business.” The result, Folkman says, can be ageing assets loaded with debt.

But Paul Jarvis, managing editor at Partnerships Bulletin, which reports on public-private partnerships, defends the industry: “Obviously it is more expensive to raise private finance than for the government to pay for infrastructure directly, but the fact is that states aren’t going to put all these projects on their balance sheets.

“And although a lot of fuss is made about the negative cases, the majority of projects are running as originally planned and are delivering the services as needed.”

Troubled waters

Macquarie first dipped its toe into the UK’s waters in 2003, with its shortlived acquisition of South East Water.

After buying the company for £386mn from the French conglomerate Bouygues, Macquarie sold its final stake three years later for £665mn. During that period, debt — some of which was raised via a Cayman Islands subsidiary — increased more than fourfold from £87mn to £458mn.

The increase in borrowing was used to pay investors more than £60mn in dividends as well as to pay off most of the costs of acquiring the company so that the final sales price was mostly profit.

Although this was a win for investors in Macquarie’s funds, which benefited from the returns guaranteed from providing an essential daily service, it was a loss for customers because a greater proportion of their bills — up from 8.7 per cent of turnover in 2002 to 14 per cent in 2006 — began to go towards paying the interest on debt.

“This is part of a pattern for investors,” says Kate Bayliss, an infrastructure finance expert from Soas, University of London. “Macquarie [and other private equity investors] move in and change the corporate structure. They refinance the assets, hiking up the debt and reducing the equity investment. Sometimes part of the acquisition cost is allocated to the company purchased.”



Macquarie repeated exactly the same strategy, but for bigger stakes, when it and its co-investors acquired Thames Water, which now has 15mn customers in London and the Thames Valley, from German utility RWE for £4.8bn in 2006. 

One of the Macquarie consortium’s first acts was to arrange for Thames Water to pay a £656mn dividend in a year in which profits were just £241mn. Within six years, the group of companies managed by Macquarie had recovered all the money it and co-investors had spent on the acquisition, by borrowing against its assets and paying out dividends.

By the time Macquarie sold its final stake in Thames Water in 2017, the company had spent £11bn from customer bills on infrastructure. But far from injecting any new capital in the business — one of the original justifications for privatisation — £2.7bn had been taken out in dividends and £2.2bn in loans.

Meanwhile, the pension deficit grew from £18mn in 2006 to £380mn in 2017. Thames Water’s debt also increased steeply from £3.4bn in 2007 to £10.8bn at the point of sale, a sum still being paid off with interest by customers long after Macquarie has moved on. Just weeks after Macquarie sold its final stake in the business in 2017, Thames Water received a £20mn fine for river pollution.

Bayliss compares this to buying a house, where the stability of the revenue flow from customer bills enables the financiers to purchase the company and take a mortgage against it. “The difference is that unlike homebuyers who pay the mortgage, they transfer the mortgage back to the company so it’s the customers who pay the interest.”

Such practices are common to private equity structures, but when the underlying companies are utilities there is an added tension: the decision over how much they can charge customers to pay for investment — both for day-to-day running and improvements — is made by the regulators who oversee monopolies. With demanding shareholders on one side and price restrictions on the other, it is the investment in the underlying infrastructure that is often sacrificed.

“Let’s be clear,” says Folkman, of Alliance Manchester Business School. “If my financial incentive is that I will be paid if I satisfy my investors, then I will do things that will satisfy my investors . . . and that’s the problem. It’s not that you’re wicked, it’s what you’re paid to do.” 

Macquarie’s decision to take over Southern Water — another UK water utility facing huge investment challenges — as it teetered on the brink of bankruptcy in 2021 was welcomed by the water regulator Ofwat.



Earlier that year, Southern Water had been fined £90mn for deliberately dumping billions of litres of untreated sewage into the sea between 2010 and 2015. Since taking over as the majority investor from a consortium including JPMorgan Asset Management and UBS Asset Management, Macquarie has pledged to raise transparency, close Cayman Islands subsidiaries at the company and to significantly increase investment in sewage treatment works.

Macquarie says it is a responsible investor. “As custodians of vital businesses which touch every aspect of people’s daily lives, we have both a responsibility and an opportunity to ensure that we are actively driving positive change,” reads a statement on its website.

But the pollution and water leaks across the sector have given ammunition to critics from all sides of the political and economic spectrum who are concerned over private ownership of crucial public infrastructure, where the government — and taxpayers — would be forced to take over in the event of any financial or environmental catastrophe.

Now, more than three decades after the regional water authorities were sold off with no debt, the privately owned monopolies are saddled with £62bn in borrowings and regulator Ofwat has raised concerns over their financial stability.

Sir Dieter Helm, a former UK government adviser and professor of economics at Oxford university, warns that instead of privatisation being used as intended, to finance investment and spread the cost long-term, “regulators have allowed [it] to be subverted by widespread financial engineering”.

“Now the balance sheets of these big utilities are largely exhausted, and without gaining the benefit of the really good infrastructure that privatisation promised,” he adds. “On the contrary, recent evidence from both water and electricity distribution suggests that in some cases not even the necessary capital maintenance has been done.”

Expanding empire

With US$200bn of global infrastructure assets now under management, Macquarie remains the biggest player in an area still rife with opportunities.

Since becoming chief executive in 2018, Shemara Wikramanayake, a Macquarie insider who joined just after the 1987 financial crisis, has prioritised climate change and renewable energy for investment as well as digital infrastructure in the form of subsea cables and data centres.

The company’s £2.3bn purchase of the UK government’s Green Investment Bank in 2017 helped catalyse that vision, and it is now one of the world’s largest renewable investors in wind farms and solar power.



With supportive governments worldwide and A$35bn ($23.7bn) of available so-called dry powder — money kept in reserve to spend when opportunities arise — few observers expect Macquarie’s influence to diminish, particularly if it is eyeing up the vast amount of investment needed to help the world move on from fossil fuels.

The company says it is mindful of the responsibilities that come with owning assets that people around the world rely upon. “Ageing infrastructure, population growth and the impacts of climate change all necessitate significant, multi-decade investment programmes to upgrade critical infrastructure and redress what can often be many generations of under-investment,” Macquarie says.

In committing to these kinds of programmes, active investment managers expect “a reasonable return to match the construction, operational and wider risks they are taking”.

But when the public perceives owners to be failing to keep up their end of that deal, it can quickly stir anger. Campaigners recently challenged Southern Water chief executive Lawrence Gosden, the former Thames Water executive appointed by Macquarie, to swim at one of England’s effluent-soaked beaches.

Although the pollution long predates Macquarie’s involvement in Southern Water, Gosden will join many water company bosses in declining to take a bonus this year, stating the utility has “clearly not met the wider expectations of our customers”. 

Yet Macquarie’s grip on the UK’s infrastructure more widely is set to tighten. In January, Macquarie, alongside the British Columbia Investment Management Corporation, bought a 60 per cent stake in the 7,660km gas distribution network in the UK, with ambitious plans to convert them for hydrogen use.

Now, more than three decades after privatisation first became popular, governments are faced with a conundrum: how they can use private finance in infrastructure in a way that delivers adequate returns for shareholders and deliver high quality services for the people — their voters — who are paying for them.

“This is the issue of the decade,” says Folkman. “We know we want lots of investment to transition to net zero and even just to repair what’s failing. But if we want to make it work for investors as well as the public we need to figure out how to do it better and soon.”

Data visualisation by Chris Campbell

A surge in US real yields — the return that bond investors can expect once inflation is taken into account — has reawakened investors’ concerns that shifts in the Treasury market are undermining one of the crucial supports for riskier assets like stocks.

The yield on 10-year inflation-protected securities, known as Tips, rose to 1.82 per cent on Friday, the highest level since 2009, as investors became increasingly convinced that the Federal Reserve would have to hold interest rates at a high level for longer to tame inflation.

Real yields are closely followed as a gauge of borrowing costs across the economy and a way to judge the relative value of risky assets.

For investors, higher real yields on ultra low-risk government debt make other assets relatively less attractive. This week’s surge took 10-year inflation-adjusted borrowing costs past the levels of last October, when bonds sold off sharply and the outlook for US inflation was far more uncertain.



“There’s a big risk that this real yield rise starts to damage the corporate sector,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International. When debt that was borrowed in an environment where interest rates were at or close to zero needed to be refinanced at much higher rates today, “that’s where the problem starts”, he said.

Ahmed added that a typical high yield company that raised money at about 4 per cent during the pandemic would now have to pay more than 12 per cent. “It’s a huge shock if you are refinancing right now,” he said. 

Analysts say that many companies took out loans when rates were slashed to help support the economy during pandemic lockdowns, and the effect of higher borrowing costs would probably be felt more acutely in the second half of next year and into 2025. 

But lending is already slowing down this year. Figures from Fidelity show that US banks have issued new loans and leases at an annualised rate of $279bn so far this year, down from an average level of $481bn between 2015 and 2019.

With financial conditions tightening, investors are also increasingly nervous about US equity valuations.

“Theoretically equity prices should be going down because the return for beating Tips is much higher,” said Jon Day, fixed income portfolio manager at Newton Investment Management. “Five years ago a 5 to 7 per cent return on equities should be good — now it’s not, it should be a 10 or 15 per cent return on equities just to keep the same gap.”

That logic is one reason why a sharp rise in real yields following Wednesday’s Fed minutes sparked a stock sell-off. Still, equities have nevertheless run up sizeable gains this year, driven largely by excitement around the possibilities of artificial intelligence prompting investors to rush in to a handful of large technology companies.

Some investors say a buoyant stock market and gloomier bond investors cannot both be right.

“What [stocks] are pricing in is that ultimately real rates will come off quite strongly in the next year,” said Arun Sai, a senior multi-asset strategist at Pictet. “But if real yields stay high it will be damaging to equities.”

Bring cash and do not be afraid to twist some arms. That might be the takeaway from a recent bid battle involving KKR.

In early June, the private equity group appeared to have won an auction for the US industrials company Circor, agreeing to pay a total price of $1.6bn.

But by the end of June, it had been forced to raise its per share price two more times to win the company, eventually increasing its initial bid of $49 a share to $56. Another private equity group Arcline Investment Management had jumped into the fray and forced its bigger rival to pay up more.

Arcline’s final bid of $57 was actually higher than KKR’s. Besides stumping up more cash, KKR also embarked on an intensive campaign to challenge the quality of Arcline’s entry. KKR public press releases as well private entreaties to Circor, disclosed recently in securities filings, offered arguments that were supposed to resonate at this unsettled moment in dealmaking.

First, even if Arcline was offering more cash, the smaller fund would be required to tap the choppy syndicated loan markets to complete its bid. KKR first had secured commitments from direct lenders Ares Management and Apollo Global. KKR then went further in agreeing to pay the full purchase price upfront out of its own equity funds. 

Second, KKR pointed out that Arcline owned a rival of Circor, Fairbanks Morse Defense, which could frighten the suddenly strict US competition authorities.

US boards have fiduciary duties to seek out the best price for their shareholders. However, with enhanced closing risk from either debt financing falling through or regulators blocking a deal, boards could, at their discretion, value certainty more than absolute dollars. As such, KKR believed it did not need to go dollar-for-dollar with Arcline, an approach ultimately vindicated.

Heightened closing risk may, however, not by itself be totally persuasive. Arcline made an initial topping bid of $52.65 that the Circor board ruled was likely good enough to be deemed a “superior proposal” to $49. In the following days, KKR would offer its all-equity backstop provision as well as a higher termination fee it would owe Circor if its deal collapsed for financing or antitrust reasons. 

It also argued to Circor that the US Navy, US Department of Defense and Congress might scrutinise a combination of the company with Arcline over the impact on the supply of valves for US submarines.

It even convinced the Circor board to speak with a former US Navy secretary who was a board member at another KKR portfolio company who explained what he thought were the risks of Arcline. Still, KKR raised its bid to $51, enough to keep Circor from accepting the $52.65 from Arcline.

Arcline was not finished. It raised its bid to $57 and offered a “hell or high water” antitrust provision that shifted much of the regulatory risk to its side. Arcline committed to putting in $1.3bn of its own equity against $500mn of loans to come from Bank of Montreal. 

Perhaps most controversially, Circor agreed with KKR that such debt financing presented some closing risk even as the amount of proposed debt was a relatively modest four times Circor annual cash flow.

As Arcline pointed out, the financing risk belonged to BMO. Like all modern leveraged buyout financings, lenders were legally bound to show up at closing with the funds as the banks were being paid high fees to shoulder the burden of selling on the debt later to specialised funds. 

Still, the Circor board decided the gap between $57 against KKR’s $51 was enough to move towards Arcline. KKR ultimately bumped to $56 along with a so-called “ticking fee” of up to $1 paid to Circor shareholders if the KKR deal had not closed by year end.

The board bet this narrower gap was “more than offset by the increased deal certainty” that KKR ostensibly provided even as Arcline came back with its own, ultimately rejected, $1.50 ticking fee that was to begin in 2024. Arcline insisted that any overlap between Fairbanks and Circor was minimal and that the debt commitment from BMO was airtight. Still, KKR was forced to raise its bid to win.

If KKR and its bidding rival were neck and neck, Arcline perhaps had little chance. It would have to sway a board that might be risk-averse, represented by lawyers and bankers who were likely to do far more business down the road with a whale such as KKR rather than a minnow such as Arcline. Shareholders now get to vote on the KKR deal and whether they want to twist any arms.

sujeet.indap@ft.com

US money market funds escaped the threat of “swing pricing” on Wednesday after regulators opted instead to impose mandatory fees and larger liquidity buffers as they sought to improve the $5.4tn market’s ability to withstand extreme stress.

A divided Securities and Exchange Commission adopted new rules aimed at preventing investor stampedes more than three years after the wild market swings of March 2020. Back then, so many investors joined a “dash for cash” and withdrew funds from the $800bn prime money funds, which hold short-term bank and company debt as well as government paper, that the Federal Reserve was forced to intervene.

After strong pushback from the funds industry, the SEC stopped short of imposing swing pricing, which requires funds to adjust the net asset value of withdrawals to reflect the costs of exit so that the remaining investors do not bear that burden.

Instead, the three Democratic commissioners approved final rules that require prime and tax-exempt money market funds for institutional customers to impose a mandatory fee on redeeming investors when a fund’s daily outflows exceed 5 per cent of net assets.

Other non-government money market funds, such as tax-exempt funds that buy state and local government debt, would be required to apply a similar fee if the fund’s board decided it was in its best interests.

Fund managers will also lose the power to halt or “gate” withdrawals when liquidity falls sharply. That practice was introduced after the 2008 financial crisis, but in 2020, it increased outflows as investors rushed to escape before any halt was imposed.

SEC chair Gary Gensler said the rules “will provide a more substantial buffer in the event of rapid redemptions”.

Gensler said the watchdog had shifted to fees in response to feedback on its initial proposals, first released in 2021. “I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens.”

Fund industry executives were however still disappointed by the outcome. “The SEC has missed the mark by forcing money market funds to adopt an expensive and complex mandatory fee on investors,” said Eric Pan, chief executive of the Investment Company Institute, a leading industry group.

He added that the industry had no experience with imposing liquidity fees. “Money market fund resiliency is an important issue that deserves full consideration. However, [Wednesday’s] decision does not seem to be a logical outworking from the proposal.”

The two Republican appointees, Hester Peirce and Mark Uyeda, voted against the proposal and each asked during the open meeting if the SEC staff was seeking to kill the prime money market fund industry.

Uyeda warned that the SEC had not given the industry enough time to provide feedback on the fee proposal. He pointed to the commission’s experience with liquidity gates, which were adopted in 201 4, over industry objections, and are now being dropped as part of the new rules.

“This mandatory liquidity fee replaces the proposed swing pricing requirement but was not described in detail to the public and thus, unlike in 2014, the commission does not have the benefits of extensive public comment,” Uyeda said. “Had today’s reforms been limited to implementing widely agreed-upon fixes to known problems, I could have supported the recommendations.”

Financial reform group Better Markets meanwhile blasted the SEC for not going far enough. Its legal director Stephen Hall said the regulator should have required funds to hold capital as banks are required to do.

“The reality is that MMFs can pose a major threat to financial stability. They do not have either insurance or an adequate financial cushion to withstand market stresses. As a result, they pose a significant risk to our economy and Main Street,” he said.