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How does Barrenjoey fit into Magellan’s (ASX:MFG) big plan?

Magellan Financial Group Ltd (ASX: MFG) $156 million investment into Barrenjoey may have surprised some investors.

Why would Magellan dabble in investment banking?

Doesn’t Australia already have UBS, Goldman Sachs, and many other IB’s?

Isn’t it a lower quality business than funds management?

Let’s have a closer look at how Barrenjoey fits in Magellan’s broader plan.

What is Barrenjoey?

Barrenjoey is a new investment bank focusing on the Australian market.

The business is majority-owned by its staff (50.1%). Magellan is the next biggest shareholder (40.0%). The remainder is owned by global banking operation Barclays (9.9%).

The majority founder ownership is the important edge Barrenjoey has over competitors. The business can offer a bigger slice of the profit pie to poach dealmakers from rival firms.

Isn’t investment banking a low quality business?

Investment banks tend to trade on low earnings multiples due to the lumpiness of deals. A big capital raising, initial public offering or takeover can substantially add to performance.

Conversely, a lack of deal flow can weigh on profits.

Fortunately, Barrenjoey has been on a number of recent blockbuster deals recently including:

  • Brookfield Asset Management’s $17 billion bid for Ausnet Services Ltd (ASX: AST),
  • Transurban Group’s (ASX: TCL) $4 billion book build to purchase WestConnex
  • Advising Sydney Airport Holdings Pty Ltd (ASX: SYD), on its $32 billion takeover offer

Transparency on the fees earned from deals is low, so it’s difficult to forecast results.

Barrenjoey is currently loss-making. However, Magellan Chairman and CIO Hamish Douglass believe if you take a 3-5 year view, Barrenjoey will be “meaningfully profitable”.

I’d argue, when you poach a bunch of dealmakers, offer them equity and a license to make deals – that’s pretty good alignment.

It’s also worth nothing Douglass held senior positions in investment banking before starting Magellan. He knows the business and should be able to add to the overall Barrenjoey operation.

How does Barrenjoey fit into Magellan’s big plan?

Barrenjoey is just one of three investments Magellan has made in the past year. The other two being FinClear and Guzman y Gomez.

Essentially, Magellan is redeploying profits from the fund’s management business into industries it knows well.

As a result, the business is moving away from being a fund manager and more towards a diversified financial group.

In some ways, it’s similar to what Warren Buffett did with Berkshire Hathaway (NYSE: BRK.B). He used the float from insurance policies to invest in other businesses and grow the overall value of the company.

By diversifying its investments, Magellan is derisking the business and creating multiple new revenue streams.

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