Business Times - 20 Sep 2007


Ask Macquarie some tough questions

By CONRAD TAN

THE managers and directors of Macquarie International Infrastructure Fund (MIIF) will have to tread cautiously in the next few months.

Their recent decisions to sell a substantial portion of the fund's portfolio to other parts of the Macquarie Bank group merit close scrutiny by the fund's shareholders and the wider investing public.

The most obvious questions that shareholders in the fund need to ask the managers and directors are: Would the assets fetch a higher price if they were sold to a buyer outside the group? Has the fund tried to sell the assets to other buyers? If not, why not?

Earlier this week, MIIF said it had agreed to sell its German oil and chemicals storage business for some 89 million euros (S$187.3 million) to another Macquarie fund, the LODH Macquarie Infrastructure Fund.

And last month, MIIF said it would sell its 3.2 per cent stake in Brussels Airport for some 52.8 million euros to Macquarie Airports Ltd, which is also managed by a wholly owned subsidiary of Macquarie Bank.

Together, the two assets comprise about 16 per cent of MIIF's portfolio by value as at June 30.

MIIF has said it would meet its shareholders to seek their approval for both sales in November. Shareholders should ask their questions then, if not before.

In the case of the sale of the German asset, MIIF has also said that its audit committee is 'obtaining an opinion from an independent financial adviser confirming whether the proposed transaction is on normal commercial terms and not prejudicial to MIIF and its minority shareholders'.

It must go further. The board should publish not just a summary of the independent financial adviser's findings, but details of how it arrived at its recommendations, including the method used for determining the value of the assets. It should also address the question of whether the asset being sold would fetch a higher price in other hands.

This may seem a heavy burden, but it is the price for taking money from retail investors.

Investment vehicles listing on the stock exchange here are becoming increasingly complex, both in their legal structure and their target investments. Many, like MIIF, have large parent groups and are domiciled offshore - in Bermuda, for example.

The often remote nature of the assets they invest in, and the fact that many of the transactions take place between interested parties means that small shareholders in these vehicles must rely heavily on the recommendations of their independent directors to safeguard their interests.

By their very nature, these investment vehicles - ranging from simple property trusts to funds that invest in exotic structured financial assets - are riddled with potential conflicts of interest, as they often start out at the time of listing by raising money from outside investors to buy assets spun off from their parent group. In return, they offer ordinary people the chance to invest in assets that are not typically within easy reach.

The proposed asset sales by MIIF - and the unhappiness of some of its shareholders over the transaction terms - is a useful reminder of the potential conflicts of interest that are inherent in such investment structures.

Such conflicts of interest are difficult to avoid, but it is right that they should be subjected to robust examination by shareholders whenever they arise.

One suggestion that has been made is for MIIF to put the assets up for auction and to hire an independent party to manage the sales.

A close reading of MIIF's listing prospectus suggests that the burden of ensuring that such transactions are conducted properly falls to its audit and risk committee, which comprises three independent directors and is chaired by Heng Chiang Meng, who also sits on the board of property developer Keppel Land. Among other things, the document states that 'only MIIF's independent directors will make decisions about transactions which involve Macquarie Bank group entities as counterparties'.

Shareholders should therefore hold MIIF's board - particularly its independent directors - responsible for the decisions they make on these transactions.

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