Breaking the mould

Babcock & Brown may in future look a lot less like its Australian counterpart and a lot more like one of its American rivals, writes Cezary Podkul.

Change is afoot at Babcock & Brown. Over past few weeks, the Australian specialist fund manager has announced sweeping changes that include the winding down of its corporate & structured finance division, laying off a quarter of its workforce, reviewing the ownership and management of several of its satellite funds and shake-ups in its board and C-level management.

All of which raises the question: what will the Babcock & Brown of the future look like?

Cezary Podkul

Discussing changes at the firm, a Babcock spokesperson recently told PEO that “going forward, it [Babcock] is going to look more like a Carlyle or a Blackstone or someone like that [rather] than like an investment bank. The main difference will be that we will still use the balance sheet to develop assets but won't use the balance sheet to make principal investments”.

It doesn't take much effort to figure out which investment bank the Babcock spokesperson may have had in mind.

As the firm wraps up its investment banking activities, curbs principal investing and sells the management rights to some of its listed funds, one can't help but see the beginnings of a disintegration of a hub-and-spoke investment bank surrounded by listed satellite funds that it advises – what's become popularly known as the “Macquarie model” after its namesake inventor, Babcock rival Macquarie Group.

The remainder would be an asset manager that foregoes advisory revenue and relies more and more on increasing operating returns by boosting assets under management in unlisted funds that specialise in its core areas of expertise: infrastructure, real estate and operating leasing. In short, something more akin to the business model of a listed private equity firm like The Blackstone Group.

Such a transition would not happen overnight. Babcock has made clear that it is committed to maintaining both the listed and unlisted funds that operate in its areas of core expertise. And it will wind down its corporate & structured finance activities gradually, so as to not disturb the businesses it intends to keep going.

And the comparison is, of course, far from perfect. Last week, Greg Ward, chief financial officer of Macquarie, advised the Wall Street Journal that “generalising the activities of other firms under the umbrella of a 'Macquarie model' is misleading”, since Macquarie manages its funds differently from its competitors and has a more diverse business mix. Blackstone undoubtedly does things its own way too.

Still, there is a distinction to be drawn between doing something different and doing the same thing differently. For the longest time – whether justifiably or not – markets have perceived Babcock to be doing the latter, not the former, with respect to Macquarie. And, judging by their respective stock performances, not much better: Macquarie is down 41 percent for the year, while Babcock is down 91 percent.

All the more reason why it may be high time for the firm to differentiate itself more clearly in the eyes of the market.