Thames Water’s problems prompt calls for Macquarie clawbacks
Thames Water’s travails this week are shining a harsh light on what has hitherto been a highly lucrative place to work: Macquarie's European infrastructure business.
Martin Stanley, the former head of Macquarie Asset Management (MAM), is the main man named on the Australian bank's communications concerning its disposal of Thames Water in 2017. Stanley, who ran the Australian bank’s infrastructure investment arm, stepped down in 2021. That year, he was paid AU$19.6m (US$13m, £10m); in 2020 he was paid AU$18.9m. Stanley can presumably afford a comfortable senescence.
While Stanley was the highest profile Macquarie executive associated with Thames Water, historic Companies House filings for holding company Kemble Water, reveal a long list of other Macquarie directors who worked on the investment. They include the likes of Edward Beckley, the former head of Macquarie infrastructure Europe, or Richard Greenleaf, who was also in Macquarie’s infrastructure team. Beckley left the bank in 2016 and is now at TPG in London.
As the British government prepares to step in to rescue Thames Water from its mountainous debt repayments, questions are being raised about how much Macquarie’s various infrastructure professionals were paid during their 11-year tenure as Kemble Water’s owners. More to the point, people are wondering whether there's any conceivable chance of retrieving any of it.
“People who benefitted from it, are responsible for this situation and they need to pay back!!,” says Ludovic Phalippou at Oxford’s Saïd Business School. “Macquarie partners probably got a lot of carry out of this deal. And will pay a reduced tax rate on that.”
Macquarie part-owned Kemble Water, which in turn owned Thames Water, between 2006 and 2017. Kemble Water itself was partly owned by a combination of the Macquarie European Infrastructure Fund LP, the Macquarie European Infrastructure Fund II, the Macquarie Diversified Infrastructure Fund, the Macquarie-FSS Infrastructure Trust, Macquarie PRISM Pty Ltd, and… LODH Macquarie Infrastructure Fund LP.
It's not clear how much Macquarie executives received in carried interest for their efforts at Thames Water. Kemble itself bought Thames Water for £4.8bn in 2006 and Macquarie sold its 26% stake for £1.5bn in 2017, suggesting it made a profit of £300m, although it may have been far more than this. Carried interest typically accounts for circa 20% of profits made on the sale of an investment; the implication is that Macquarie's partners shared £60m at least.
While many of the Macquarie people are relaxing on the golf course, Thames Water's new owners (Canadian pension fund Omers and the Kuwait Investment Authority) are now struggling to service the £2bn pile of debt Macquarie left them with. A bailout is posited.
There's no indication that Macquarie or anyone named in this article did anything legally wrong at Thames Water, but the financial gyrations it performed as the utility's owner are contentious. "I would be very inclined to insist on the clawing back of past dividends and private equity fees," says Daniel Davies, a banking analyst who also happens to write Morning Coffee for us. "Also to look around for some strict liability offenses with prison sentences attached. Nationalization at zero cost is the generous option."
Unfortunately, clawing back carried interest is unheard of. Clawing back bonuses, however, is not. Macquarie's remuneration report contains a detailed explanation of the bank's clawback policies and the situations in which they apply. Although the bank's executives sold Thames Water at a profit, they have heaped opprobrium and reputational risk on their employer. That should surely count for something?
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