Great. As is customary, we'll hear from both our CEO, Shemara Wikramanayake, and our CFO, Alex Harvey, on the results, and there will be an opportunity for you to ask questions, following that. We'll start in the room, and then we'll go to the lines. With that, I'll hand over to Shemara to go through the result. Thank you.
Thanks, Sam, and welcome. Good morning, everyone, from me as well. As usual, we'll kick off our half year results by just noting the footprint of the business that we have. As we've shared many times, we have a very good diversified portfolio of businesses across four operating groups. We have two annuity style businesses, which are BFS, our Australian Banking and Financial Services business, and our global asset manager, Macquarie Asset Management. Then we have two global market-facing businesses in our Commodities and Global Markets, and our Macquarie Capital business. These businesses give us good diversification through the cycle and resilience. In the environment we just had, we had an equal contribution from each of the annuity style and the market-facing activities.
Now, those operating businesses are supported by four important support groups, our Risk Management Group, our Legal and Governance Group, our Financial Management Group, and our Corporate Operations Group. All of our group heads, I think, are represented either in the room here today or dialed in. If you have questions, they'll all be here to speak to you. Turning to the results for the first half, as you can see, we delivered a result of AUD 2.305 billion. That was up 13% on the first half of last financial year and down 13% on a very strong second half last financial year. The return on equity was 15.6%, which is commendable in this environment.
Looking at the contribution from the operating groups, in terms of the result versus the first half of last year, they were up 15%, and that was principally due to contribution from the market-facing groups, which were up 35% on that period. Looking at them versus the strong second half, as I mentioned last year, they were down 17% with the annuity style and the market-facing being down on that very strong period. Indeed, if we look at it over a longer period, and that's the last five halves, you can see the operating income, and the profits, and the earnings per share kept stepping up until the second half last year, in which we had some very strong realizations, and asset sales. The result for this half is down slightly on that.
Our assets under management, as you saw at the beginning of this financial year, stepped up quite a bit with the two large acquisitions we did in the public investments area. In this half to September, they're up 3%. The main driver there is the investments being made in the private markets business and the benefits of foreign exchange movements, partially offset clearly by the movement in markets, particularly equity markets. Then looking at the diversification of our income by region, you can see there the Americas with 38% of our income, EMEA 24%, Asia 10%, and Australia 28%. You may recall last year the Americas had stepped up to 48% because of some very large one-off gains in the Americas.
I think this is showing a trend that we've been foreshadowing for a while, which is that the percentage contribution from the Americas and the EMEA region will continue to grow, particularly relative to Australia. That's while Australia, as you can see on this slide, continues to grow in absolute terms. The fact is we're quite mature in a small market here, whereas in North America and EMEA, or in the Americas more generally, and EMEA, we are a small representation at the moment in very big markets. As we grow a little bit there, the percentage grows more materially than the Australian. Now, looking at each of our operating groups and their contributions through this period at a high level, Alex will take you through more detail in a minute.
The asset management business, Macquarie Asset Management, contributed 31% of our income in this last half year at AUD 1.402 billion. That was up 28% on the prior comparable half. Some features to note are in the private markets business, the equity under management is now at a record AUD 188.5 billion, having raised also a substantial record raising, of over AUD 20 billion in this half, AUD 22 billion. We have dry powder of AUD 30 billion as we go into the next period. I'd also note that the Green Investment Group was brought over into the asset manager last year. As you may recall, that integration is growing well. We've launched our offshore wind platform, Corio, in this period.
In the public investment side, the assets under management at AUD 520.7 billion are down 3%. The main driver there, as we said, is market movements, partially offset by foreign exchange. Good contribution from the asset manager. Also, the Banking and Financial Services Group, 13% of our income, up 20% on the prior comparable period at an AUD 580 million contribution. You can see there that every line of the business has continued its organic growth with our home loan portfolio up 13% now at just over AUD 101 billion. Business banking up 7% at AUD 12.3 billion. We had inflows into our funds on platform, but they were down slightly due to market movements.
Now, I'd note also the quality of the book there in terms of the LVR at which we're able to grow our home loan portfolio also remains very strong. All of that growth supported by, again, a big step-up in deposits, where we've had the deposits growing now to AUD 116.7 billion. Turning to the market-facing businesses, Commodities and Global Markets, the largest contributor in this half, 43% of our income and a result of AUD 1.996 billion, which was up 15% on the prior comparable period.
We had good solid contribution from the asset finance business, even though you may recall at the end of last year, we divested the UK industrial and commercial meters business, which took the book from AUD 56 billion down to AUD 5.7 billion, but solid contribution there. In our financial markets and our Commodities and Global Markets businesses, we saw volatility driving increased client need and activity and opportunity for us to step up and support our customers. In financial markets, that drove good results in increased earnings in foreign exchange, also futures and the financing activities in equity derivatives and trading. In the Commodity Markets , we had an increase in terms of our revenue from risk management across all of power and gas, resources, global oil.
In the inventory management and trading income area, we did see gains from the gas and power business, but that was offset by the timing of income recognition in storage and transportation contracts. Then Macquarie Capital contributed also 13% of our income in this last half, down 12% at AUD 595 million. The big factor there, obviously, is that activity levels are much lower in this environment, and that's meaning that fee revenue is lower across areas like mergers and acquisitions advice and capital markets advice. Having said that, our principal investment book has continued to grow, sitting now at AUD 18 billion.
Particularly in private credit, we've grown that book now to AUD 15 billion, and we're having increased income from the credit side, and we had some good realizations in this first half, particularly in real estate and in our digital infrastructure businesses. That's the contribution from the four operating groups. That was supported as ever by a strong funding and capital position. You can see here that our funded balance sheet remains strong with our term funding still comfortably exceeding our term assets. We were able to raise AUD 15.4 billion of term funding in this half, on top of the over AUD 48 billion that we raised in the last half. We're well positioned with our term funding, and as you can see, we're sitting now with all of that funding over AUD 100 billion of cash and liquids.
In addition to that, I mentioned our customer deposits. The BFS team have been growing those very well, and we're at AUD 122 billion now of deposits, up 20%. Good funding position, and also in terms of capital, a strong position where our Basel III surplus has gone from AUD 10.7 billion up now to AUD 12.2 billion. Drivers of that clearly were the earnings in the first half, offset by the dividend that we paid, hybrid issuance that we did contributing AUD 800 million, and then the net absorption of capital in the businesses, which as you can see, was not massive in this period. In Macquarie Asset Management, there was AUD 400 million going into ongoing supporting the organic growth of that business, either seed assets for funds or co-investment into the new funds.
BFS continued to absorb capital in the growth of its mortgage book, its business banking book. In CGM, we had a release of capital, and that's really counterparty credit capital that we're holding and driven by market movements. In Macquarie Capital, we had some investments. I mentioned we're growing the credit book in principal finance and also some digital infrastructure investments. Now, the large absorption of capital was in FX movements, which is offset by our foreign currency translation reserve. We also are sitting with strong regulatory ratios well above the Basel III minimums, as you can see there. Given that result and where we're sitting with capital and funding, the board has declared an ordinary dividend of AUD 3 for the half year. That is a 50% payout ratio.
With that, I'll hand over to Alex to take you in more detail through the performance of the businesses and come back to talk about our outlook. Thanks.
Thanks, Shemara. Good morning, ladies and gentlemen. As Shemara said, I'll now take you through more of the detail on the financial results for the first half and then talk about some other aspects of the group over the last six months. Starting now with the income statement. You can see here operating income for the half up 11% from where we were in the first half of 2022. The key drivers there were a 39% increase in net interest and trading income, reflecting the growth in the loan books across the group, together with the strong trading conditions that we saw.
You can see a 56% increase in investment income, and that reflects disposals that we saw across our green energy portfolio, the real estate assets within Macquarie Capital, and the digital infrastructure assets. Those were partly offset by a reduction in fee and commission income, down AUD 420 million, and a lower contribution from the share of joint venture, associates, joint ventures and associates. Operating expenses were up 11% also for the half versus the first half of last year. The key drivers there really were the increase in employment expenses reflecting higher average headcount in this half versus the first half of last year. Wage inflation coming through, together with higher profit share expense and share-based payments expense reflecting the underlying performance of the group.
The income tax, the effective tax rate for the half was up at 24.3%. The bottom line, 2.3, just over AUD 2.3 billion, up 13% from where we were in the first half of FY 2022. Turning now to more of the detail for the individual operating groups and starting with the asset management business. You can see profit for the half up at AUD 1.4 billion, up 28% the first half of last year.
Key driver there was the increase in investment-related income coming through largely from the disposal of the assets in the Green Investment Group that we transferred into Macquarie Asset Management during the half net of the gains that we saw in the first half from the disposal of the MIC assets in the first half of last year. A step up in investment-related income on a net basis. Expenses were down during the period, largely reflecting the fact that we had one-off costs, as they said, with the acquisitions, particularly with Waddell & Reed in the first half of last year. You can also see base fees up AUD 16 million, and there's a couple of things that are worthwhile highlighting there. The private markets base fees were up 12%.
We obviously had favorable foreign exchange movements coming through, and they were partly offset by the market moves across our public investments business, together with outflows across some of our equity portfolios in the public investments components of that business. In terms of the underlying drivers, assets under management obviously key. On the left-hand side there, you can see the private markets piece, a really good period of investing, nearly AUD 23 billion of additional assets under management through the investment activities across the platform in the first half. A favorable FX, so pushing up the assets under management by AUD 36.9 billion. On the right-hand side there, you can see the market moves.
The market moves over the first half offset, or mostly offset by the FX effect that we had coming through, on the public investment side as well. Turning now to the Banking and Financial Services business. Obviously, a really strong result, AUD 580 million, up 20% from the first half of last year. That really reflects the growth in the loan books. It also reflects the recovery in margins that we're seeing coming through that business. In terms of the segments, Personal Banking up AUD 119 million. That reflects an average 30% average growth in loan volumes in our mortgage business.
Although we did see a moderation of the growth in those loan volumes toward the second half of the first half in FY 2023. A really strong result from the mortgage perspective. On the business bank, up AUD 55 million. We saw a growth in the loan books. We also saw a growth in the deposits, and we had better margins on the deposits coming through that business. Wealth management income up AUD 76 million, reflecting the growth in deposits and improved margins on deposits coming through that business. You can also see the step up in expenses. We've talked about this for a while now. The team in BFS investing heavily in the platform, increasing head count to support the growth that we're seeing coming through there.
Increased investment on the technology side to make sure the platform supports the digital business that Greg and the team are running down there. Obviously, investment that we're making across our regulatory obligations and compliance obligations. You saw that coming through for the first half as we foreshadowed. Now in terms of the underlying drivers of the business, home loans up, business loans up, deposits up. We saw a partial reduction in the platform assets. Obviously, that's mainly market moves coming through over the first half. You can see the fall off in car loans there.
Remembering that we sold obviously the dealer finance book in particular in the second half, or we completed the sale of the dealer finance book in the second half of FY 2022. Turning now to the first of the market-facing businesses, the commodities and global markets business up just under AUD 2 billion worth of contribution for the half, a really strong result. Obviously, we had strong conditions across most of the platform in CGM for the first six months of the year. Turning to the component parts, you can see commodities up AUD 635 million, about 50% up on where they were for the first half of last year.
Pleasingly, we saw a step up of AUD 547 million in the contribution from the risk management aspect of that business. That's where we're providing derivative solutions to clients. We've had an expanded client base there. Obviously, we saw strong conditions, lots of volatility, lots of transaction activity in the first half. We particularly saw good contributions across gas and power, and that's obviously becoming much more of a global business. We saw contributions across all regions in the gas and power business. We saw an increased contribution from the resources segment there together with global oil. On the inventory management and trading, up AUD 20 million from the first half of last year.
We saw good trading gains, particularly through the North American gas and power business, offset by that timing of income recognitions associated with the transport and storage assets that are used in that business, both in North America and in Europe. Really pleasing result from a financial markets perspective, up AUD 263 million, just over 70% increase from that business last year. That's obviously FIC, futures, credit markets, that sort of business in our CGM business, up AUD 263 million, a 70% increase. Obviously, we saw lots of transaction activity through the first half. The other thing we saw, and I think it'll be very familiar to people, is volatility in FX markets and interest rates.
We saw a lot of volatility, particularly through the first half of the year in that business, and the business was able to provide solutions to help clients manage that risk over the course of the first six months of our year. Investment income down AUD 523 million. That largely reflects the gain that we saw in the first half of FY 2022 from the disposal of the industrial and commercial meters business in CGM. You can see expenses up over the period, again, reflecting a slight increase in headcount. In average terms, the headcount is up about 5%.
We see the investment that the team is making, the technology platform to support the business, together with the investments being made in regulatory and compliance obligations in that business. In terms of the underlying drivers, again, a chart, hopefully it's familiar to people. You can see on the top right-hand side there, you know, the key driver of this business obviously is client numbers, actually being able to provide our services to more clients in more regions and more often, and we see that continuing through the first half of FY 2023. You can see that reflected in the underlying operating income, the underlying client business driving the big step up in operating income for CGM for the first half.
From a capital perspective, I'm sure people recall March 2022 was quite an elevated level of capital in CGM. That's remained pretty consistent over from period to period. Although we did see a spike in capital usage, particularly in the middle part of the half with energy markets across the world. In terms of Macquarie Capital, a more subdued period. Not surprising, obviously, with transaction volume. If you look at where we are for the first half, AUD 595 million of contribution. You can see the component parts there. Fee and commission income down 23% from the first half of last year. That's both from an M&A perspective, together with on the capital market side.
Operating expenses up through the period. Again, the investment that the team's making in the platform to support the growth of the business going forward. Those two are partly offset by an increase in investment related income. It was good to see the disposals coming through the real estate assets that the Macquarie Capital have on their balance sheet, together with the digital infrastructure assets that the team has been working on building over the last couple of years. We also saw an increased contribution from the principal finance portfolio, up AUD 89 million in terms of the contribution for the first half of FY 2023. As I mentioned, you know, one of the key things from Macquarie Capital is the capital we have alongside our clients there.
You can see what's going on in this chart, up from AUD 3.6 billion to AUD 4.1 billion at 30 September. The primary mover there, I guess, is the increase in debt that you see coming through together with the increase in digital infrastructure investment. The team has found some additional investment that they've been able to make in Philippines Tower portfolio over the course of the half. It was good to see that coming through. Obviously, those that capital investment or capital partnership should pay off into future periods. That's the operating group. I might now turn to a couple of other aspects of the financial result for the half.
One of the things that we have been doing over the last few years is investing significant amounts in the platform to support the type of organization we wanna be, to support our ability to grow going forward, and obviously to meet the obligations that we have across the group. We set out a couple of slides here which illustrates some of where that expenditure is occurring. Firstly, maybe to start with the regulatory compliance slide. You've seen this before, up 41% from where we were in the first half of FY 2022. There's a couple of aspects there. You can see an increase in regulatory change and project expenses up 60% from the first half of 2022. Some key programs of work there.
We're doing end-to-end cap on liquidity transformation across the group. We're obviously working on our APRA remediation program that we talked about before, and we're continuing to uplift the focus on non-financial risk across the group. Some of that finds its way into business as usual spend, and so you can see that up 33% from the first half of FY 2022. Obviously, there's an ongoing obligation to meet our obligations. Also some of that project spend that we see, that translates into ongoing business as usual expenditure coming through our regulatory compliance efforts. On the bottom part of that chart, you can see the technology spend over the last few years, up an annual growth rate of 12% over the last four or so years. A significant investment being made to support the growth of the business.
In particular, there's obviously lots of activity here, but in particular, the team is making a significant investment in data and in data analytics in end-to-end straight-through processing, and all the way to cyber and of course, increasing use of cloud capability across the group. Now in terms of essential support areas, another area we've been investing heavily over the last few years, you can see here the expenses up FY 2022, nearly AUD 2 billion in the first half of 2023, AUD 1.26 billion of expenditure across corporate operations. What COG is doing, apart from running the operations of the group, particularly focused on data analytics, automation, machine learning, helping us actually meet our obligations, but also position ourselves to grow.
From a financial management perspective, modern financial management, thinking about real-time analytics to support the groups. From a risk management perspective, you can see the focus around non-financial risk, and uplifting our capability to manage risk across the organization. These are very significant investments that we're making to support the platform, further embed and strengthen the foundations of the group, enable better risk management. The other thing that's very important is enabling the groups actually to nimbly move towards new opportunities to actually change and adapt and actually see opportunity coming forward. All these investments that we're making, the central support groups, are important to do that.
During that period of time, of course, what we've been able to do is deliver an average return on equity over that same period of time of about 16%. We're able to continue to deliver despite the increase in cost. Of course, what we think we're doing is setting up the business to be well-positioned for the future. In terms of the balance sheet, Shemara mentioned obviously a very consistent story, a solid conservatively positioned balance sheet. Pleasingly, we saw the opportunity to raise AUD 15.4 billion worth of term funding over the course of the half. That was split pretty evenly between term funding for the bank and term funding for the group. The diversity of issuance is something we've talked about before.
We continue to look for new pockets of funding to support the efforts of the group. Obviously, from a weighted average life, the term funding is quite long dated, supporting the activities of the group. In terms of the deposit story, up at AUD 122 billion worth of deposits, up 19% from the half. I think what's really pleasing about this story in particular is what's happening in BFS, expanding the product footprint portfolio, tailoring products to meet the customer demand. Over the course of this half, we saw a really good step up in our transaction and savings account.
That account actually is something we introduced, I guess, about two and a half years ago, so that's now growing nicely. The other thing we saw was the opportunity to grow our retail term deposit portfolio. In terms of the loan and lease portfolio up 11%. You can see the key drivers there. Home loans at the top of the page really driving the step up. The other thing we've seen during the half is the increase at the bottom of that stack, really in the corporate and other lending, which is the private credit business. Largely the private credit business that Macquarie Capital has been growing over the last few years. From an equity perspective, up AUD 1 billion on where we were for 2022.
I guess the main thing to point out there probably is the use by MAM of the balance sheet, the asset management business of the balance sheet, putting their foot on seed assets that we see, which will ultimately make their way into new mandates and new products for customers in that private market business. In terms of the regulatory update, lots of things going on. I mentioned that obviously previously. A couple of things to point out here. Firstly, in relation to the new capital standards, they obviously become in force at the first of January. Been a long time coming. We're obviously pleased that that process is now complete.
We're obviously well advanced in terms of our preparation for that, and have been holding capital aside for those changes for some time. The other thing I might point out is just the work that we're doing with APRA in relation to the MBL remediation program, a really important piece of work. Obviously, the end result of that program is improved processes, improved systems, improved frameworks. And plainly, we think it'll further strengthen the risk culture across the organization. In terms of the bank capital ratio, very strong at 12.8%, as is liquidity position, in terms of the LCR itself, but also the unencumbered liquid assets and cash that we have on the balance sheet over AUD 75 billion.
Finally, for me, in terms of capital management, just a couple of things to mention here. During the period, out of the group, we were able to issue a new hybrid raising AUD 750 million. We're also able to do a tier two issue out of MBL, raising AUD 850 million. We appreciate the support that we get from investors across each of those areas. The final thing to mention for me, in terms of the interim dividend, the board has resolved that no discount will apply for the first half 2023 dividend reinvestment plan, and that we intend to acquire shares on market to satisfy any applications under that plan. With that, I'll hand back to Shemara. Thanks.
Thanks, Alex. I'll take you through the outlook now, starting as usual with the short-term outlook. As you know, we look at this by each of our operating groups. First of all, Macquarie Asset Management. We're expecting the base fees in this business to be broadly in line with last financial year. That's because the investing that we're doing in the private markets and the acquisitions that we've done on the public investment side are largely substantially being offset by the market movements that we've had over this financial year so far. In terms of net other operating income, we expect that to be significantly down on last financial year because we won't have the repeat of the large contribution we had from Macquarie Infrastructure Corporation, despite the higher performance fees we expect, which will partially offset that.
Similarly, with the Green Investment Group, we had some very large realizations last financial year. We expect this year's contribution there to be significantly down. Again, despite the material gains from realizations we had in the first half of the financial year, we don't expect that to recur in the second half. With Banking and Financial Services, we expect growth in the loan portfolio, deposits and platform volumes to drive earnings. As Alex mentioned, we're seeing a slowing in the rate of growth there. We also expect market dynamics to continue to drive margins, and we also expect higher expenses as we continue to invest in areas like volume growth, technology, and regulatory requirements, and we will have ongoing monitoring of provisioning in that business.
Macquarie Capital, subject to market conditions, as we noted, transaction activity is expected to be substantially down on a record year last financial year, with market conditions, as you've seen, weakening in this financial year. Investment-related income we expect to be broadly in line due to the increased revenue from the growth, as we mentioned, in our private credit book in principal finance, but offset by lower revenue from asset realizations. Again, Alex and I mentioned we had some good realizations in the first half of that business, but we don't expect that to recur in the second half of the financial year. As we both mentioned, we're continuing to deploy the balance sheet in that business in credit and equity.
In Commodities and Global Markets, we expect increased income from the commodities business compared to last financial year, after taking account of the impact of timing of income recognition in our gas and power, transportation, and storage contracts. We also expect an increased contribution from financial markets across our client and trading activities, and you've seen that in the first half as well, and then continued contribution from the asset finance business. At the corporate level, we expect the compensation ratio and the tax rate to be in line with historical ranges and outcomes.
Now, that short-term outlook, as ever, remains subject to a number of factors, and some of the ones that apply at the moment are clearly the market conditions, which include the global economic conditions, inflation and interest rate, outcomes, significant volatility events, and the impact of geopolitical events we're seeing playing out. It also is subject to the completion of period end reviews and the geographic composition of income, impact of foreign exchange, and potential tax and regulatory changes and other uncertainties. We continue to maintain, as you've seen, a cautious stance with our conservative approach to capital funding and liquidity, which we think positions us well for all environments, but particularly the current environment.
Turning to the medium-term, we continue to believe that we're well-positioned through, as I mentioned at the beginning, the diversification of our footprint across business lines, across geographies, supported by our ongoing investment in our platform, but in a disciplined way in terms of managing our cost base, our strong and conservative balance sheet, and our proven risk management framework. You can see that play out in terms of the returns we've delivered. Alex mentioned a 16% average over the last five years across the group. In our annuity style businesses over the last 16 years, we've delivered an average 22% ROE and have done that again in this first half. In our market-facing businesses, we've delivered an average 16% over the last 16 years and 20% in this most recent half.
Even after our AUD 12.2 billion surplus capital, as we mentioned, we've delivered a 15.6% ROE in this half. With that, I will hand back to Sam to take questions.
Great. Thanks, Shemara. As I said, we'll start with questions in the room, and then we'll go to the phone lines. John, just at the front, if we can. Thanks.
Justin Moffitt from Barrenjoey. Question on slide 30, so if you can pull that up. On the commodities business, on the left-hand side, it shows really good growth coming through, especially seeing that come through from the commodities risk management side continue to grow period after period. I understand the volatility has been very good for that business in the last little while, but given that the environment's unlikely to reduce volatility, given global events that you called out, as well as the decarbonization leading to some pressure on sustainability of energy over the next little while, why wouldn't we see that continuing to grow? You tend to always try to be conservative and say how it's great period, but you can see the light green box there has continued to grow.
It's hard to see why that would turn around anytime soon. Then a follow-on question is if you then look at the inventory management trading, I understand that the box at the very top, it goes up and down, and there's timing, and we've heard about that many times, but it tends to be very seasonal, and you're coming off a very low period in the first half. Why is it so seasonal, and why wouldn't that recover into the second half, which would potentially offset some reduced volatility that's coming through from other parts of that business? Seems like this business is pretty all set up.
Yeah. Thanks, John, for that couple of questions. I think you're right that ultimately, you know, medium-term, we're growing a franchise here where we're increasing the markets in which we operate, the customers, producers, consumers, et cetera, that we support. As you've seen, we've grown from North America into our franchise growing in Europe into Asia. Over time, that's what we're focused on, is patiently, adjacently growing the franchise. Having said that, we call it a market-facing business because in any particular period, it's gonna be impacted by the activity levels and the volatility, persisting. Now, that may look seasonal when you look at the last two financial years, but actually it can vary completely. We had a very active first half of our financial year this year with the issues.
For example, if you look at the European gas and power market, what went on there, TTF went up to 350. Unheard of, with the curve having sat at 20-30. That's now abated a lot. Germany is sitting with 96% storage as we now go into the winter. We're having slightly warmer temperatures, so things have come off a lot. In fact, the price spot was negative. Ultimately, the level of market activity within any period, it's not really seasonal, can really impact both our risk management service income, but also our inventory management and trading. Medium-term, we're looking to really keep growing those franchises, you say, especially with energy transition, et cetera.
With the inventory management and trading, we did highlight. Alex mentioned as well that the storage contracts in European gas and power do mean that we had basically timing of income recognition impacts that should come back this financial year. Nick's sitting in the front row. I might let Nick add to that. Nick, if you have anything you want to elaborate on, but I guess my overall comments are medium-term, growing the franchise, short-term, environment impacts.
Thanks Jonathan and Shemara. Yes, look, I'd reiterate what you're saying there, Shemara, in terms of the focus that we've had over time in terms of investing in growing the franchise, particularly in terms of the client servicing nature of the business. We do think that over time the services that we provide will be important for the client base, particularly as we work through the transition. We're establishing the business to be able to adopt, to evolve and adapt to the needs of the customers as they change. Indeed, a lot of the conversations that we have with our clients on a daily basis are about these types of subjects. We'll continue to invest in that.
In terms of the inventory management question, to Shemara's remarks earlier, while it may appear at times that this can be seasonal, what we have seen over the course of the last half is truly exceptional conditions. They have subsided. Not only what we've seen in Europe, but we've also seen something similar happen in the U.S., where if we just look at the benchmark price for natural gas in the U.S., which is Henry Hub, we went all the way up to $10 and back down to $5 twice. Heading into the U.S. winter, inventory levels are very healthy and also our production levels. The market seems to be well-placed going into the Northern Hemisphere winter.
Go to Brian at the front. Thanks.
Brian Johnson, Jefferies. Perhaps I could ask that same question a slightly different way, perhaps some numbers around it. If we have a look at the difference between the economic accounting and the accounting, it periodically seems there's a big gap that widens, which unwinds over the subsequent periods. I'd just be interested in the total size of that unrecognized balance sheet asset and the timing that we should think that it unwinds over, 'cause it's like a hidden reserve. I'm guessing it unwinds over two years. The second one, if I may, is that when we have a look at the bank balance sheet, it is extraordinary how much liquidity you've got there. We can see the LCR is not really 175, it's 180-something, 'cause you guys take out the CLF, your peers don't.
You've got a massive balance of unencumbered balance sheet liquidity. Everything you see is just its long duration funding. Should we be thinking that this is an opportunity just to raise more deposits, or it's telling us about future growth, or is it, in fact, telling us something about what happens to global liquidity going forward?
I'll briefly comment and then hand over to Alex. Accounting versus economic impact, Alex can take you through the details, but the timing of the reversal of that can vary depending on whether it's storage in Europe, transportation contracts in Americas, et cetera. Alex can give you a bit more color on that. In terms of the liquidity, you know, we are sitting with big liquidity at the moment, but as you know, we run prudent balance sheets throughout the cycle. You know, we're in very uncertain economic times at the moment.
Our view is if we can be returning a 15.6% ROE and sit with the surplus capital we have and the prudent termed out funding we have, we think it behoves us through this next cycle to be positioned for upsides and downsides with sitting with that particularly strong balance sheet.
Thanks, Shem. Just on the sort of timing of income recognition on the storage and transport. There's a lot of variables in that. I mean, obviously, spread moves are one thing. You know, that obviously sort of is a factor. Then how those spreads move over time. You know, that's not something that. I guess the third thing is, you know, there's a portfolio of contracts that we have access to or pipelines or storage fields we have access to, and we're often doing new deals. You know, new power lines or new transmission capabilities. You know, there's a lot of variability in that particular line.
You know, what we've done, obviously, Brian, is try to without sharing 'cause there's a lot of moving parts there. Without sharing the detail of all those moving parts, 'cause some of them are obviously you know future forecasts of what happens with prices. Just put all that together from our viewpoint with all that we know and saying, "Look, if you look at the commodities income, we expect it to be up, including the impact of what's happening with income recognition around gas and storage and transport contracts." We think that's a better way to think about it. They're obviously an important part of the business.
You know, we have a really, I think, strong businesses based on both our physical presence and our financial presence. It gives some accounting versus economic, you know, mismatches. Overall, when we look at it, we think that the full year guidance is a better way for you guys to think about how that might mean from a group perspective. I think Shem covered the liquidity point very well, obviously, and I agree with what she said. I mean, a few things. The market conditions through last year, obviously very supportive. You know, if you looked at, we raised over AUD 48 billion of term funding last year.
I mean, just to put that in perspective, you know, ordinarily, you would have seen us raise AUD 25 billion-AUD 30 billion of term funding a year. You know, there were opportunities for us to, because of the market conditions, both lengthen the maturity of the balance sheet and also take advantage of the conditions that we found. We obviously continued that over the first half.
That seemed to make economic sense anyway to do it. I mean, there's a few other things that are happening. If you look at the growth of Greg's business, obviously, you know, essentially deposit growth funding that business and, you know, we're getting in front of that deposit growth and all the growth of the mortgages through raising the deposits. You got the TFF that needs to be refinanced in a couple of years' time, so getting in front of that exercise makes sense. You've got the CLF being withdrawn from the market, Brian. I think I'd put it in the context of the broader story, which is, you know, from a group viewpoint, the underlying philosophy is conservative, strong balance sheet.
You know, be prepared for, I don't know what the future holds, but make sure you try to get in front of it. I think it's probably that.
Andrei?
Morning, Andrei Stadnik from Morgan Stanley. I wanted to ask two questions. Maybe I'll ask them together, just in interest of time. In terms of MAM and, you know, the Green Investment Group in particular, there was AUD 1 billion of investment related income in this half. But it doesn't look like there were a lot of major green fund launches to offset this. How are you thinking about, you know, changing the mix of revenue in that business now, you know, going forward? Are you doing enough in terms of green fundraisings? My other question on costs, you know, how do you think about, you know, cost flexibility, you know, in case revenues do stay subdued for a little bit longer?
You know, we know that Waddell & Reed and AMP Capital integration costs will fall away, but are there any other, you know, cost factors you're thinking about?
Thanks. Starting, Andrei, first with the question on the Green Investment Group. We moved it over to the asset manager last year, as you know, at the end of last year. There's AUD several billion of balance sheet there, which we will continue to either run off and realize principal gains or bring over to the seed assets to fund. You'll see some realizations, but gradually we'll shift much more to base fees and performance fees. Now, in MAM, we already had the MEIF series of funds, a global renewable energy fund. We've done fund one and fund two. What we found by bringing the Green Investment Group across is the deployment stepped up a lot because the pipeline of investments they access by having this team stepped up a lot.
MEGF two has got invested a lot quicker, and hence we launch into MEGF three, which is a more mature energy fund. In addition to that, we're raising an energy transition fund. The acronym for that is MGET. That's out on the road, and that's going very well. It's meeting good demand. What we intend to do, as we do with all our asset management business, is be very disciplined about the size of these funds. We've seen others raise very big energy transition funds. I think we're going to pace ourselves and keep raising, you know, reflecting our ability to get really well invested, because for us, that's the biggest thing, is to be delivering superior return to investors on each of these funds and gradually build a very big franchise there.
I think the team have very good capacity to invest, but we don't wanna go beyond their capacity while they're also realizing assets. In terms of costs, you know, we do say that we're disciplined on costs, and we thought it was important to share that, we are still investing a lot in our cost base. Even though we say we're disciplined, we want the business to be really strong and resilient. As Alex mentioned, we're investing in areas like, automating our end-to-end processes and making them more robust in non-financial risk responses, regulatory compliance. At the same time, in our businesses, we're constantly looking at how we can be most efficient. As you say, there's big cost savings from the integration of Waddell & Reed and also AMP happening.
In the investment bank, we're constantly looking at where we position the business to drive efficiency. Greg's sitting here in the front, and I know you're investing a lot, Greg, in BFS, but at the same time, both you and Nick sitting there are constantly looking at how we can do things more efficiently. I don't know if you have a couple of examples you might wanna share in terms of as you grow. Could we just give Greg a mic as well, just to give you, Andrei, a sense of everybody's owning return on not just capital, but OpEx investments.
Yeah. Thanks, Shemara. As you say, big investments in regulatory compliance and all the emerging rules there, and that's super important to a business like this. Enormous investments in cyber and fraud management and so forth, and then we've seen just how important that is, so we continue to invest. In the business bank, an origination platform and our online banking capabilities for the business bank, and of course, we're upgrading the platform on the wrap side as well, so more solutions. There's a lot of investment.
I think your cost to income ratios are actually improving as you do that.
They're gradually improving, particularly in some areas, but offset by some of these investments. Of course, we're not building for the business to be current size. We're trying to build and scale this business to be much bigger.
Yeah. Thanks.
Okay. John? John Storey?
Thanks very much. It's John Storey from UBS. Appreciate the detail on the costs, so thanks for that slide. Got a question on FX sensitivities and just trying to understand what the results would look like on a constant currency basis. Obviously, you provide what the revenue is and where it comes from, but would be interested just to get a sense on bottom line constant currency earnings. The second question I have is around capital allocation. BFS obviously continues to grow very strongly. Wanted to get a sense, obviously the BFS ROE is a little bit lower, so just get some insight into the ROE and how the group thinks about continuing to support that division. Thank you.
I might answer the first question, and then I'll hand over to you for the second. Basically, the way we look at ROEs, we have hurdles for every business line we're in, not just at the operating group level, but underlying in the operating groups for each division we're in. If we're doing private credit in Macquarie Capital as opposed to private equity, we will have benchmark returns that we think we need to reward us for the risk. If we're hitting those benchmarks, then we're happy to support those businesses. For BFS, we have a hurdle. If BFS is beating that hurdle, which it happily, comfortably is, we're happy to deploy more capital. Now, in MAM, which is a low capital intensive business, we have much higher ROE. The group ROE is a blend of all of those, ROEs of the various businesses.
We're not prescriptive about what mix and weighting we want. We try to invest in all of them, so they're all growing together. Ultimately, the group ROE is a result of where the mix is across those businesses. In each of them, we're very disciplined in what do we need to put a dollar in, not just MAM, but in public investments versus in real estate versus in private credit.
Thanks, John, for the question on FX. I mean, obviously, as you've seen from the slides previously, if you look at the 70% of the income being, you know, offshore, then there's a relationship, 10% depreciation one way or appreciation will drop about 7%. That's sort of the general rule. I mean, the first half was relatively unaffected from an FX viewpoint. Because if you think about it's a bit of a mixed story. You know, the Aussies obviously depreciate against the US, but the pound's been pretty weak, the euro's been pretty stable. If you think about the diversity of the business, the FX story across the group is a pretty muted one other than the US.
I mean, the other thing obviously is the FX generally from a revenue viewpoint. It's mainly affecting the flow type businesses. You know, if you think about the asset management business, particularly the public investment side, it obviously affects that where you've got regular flow of income. Where we're doing transactions, we obviously swap it back into Aussie dollars effectively the day the transaction's done. So relatively muted effect. I mean, it would've been, I don't know, less than 1% or 2% in terms of the bottom line from an FX perspective. You know, we hedge our capital as Shemara talked about before, and you can see that movement coming through the foreign currency translation reserve.
That you know where you've got a depreciating Aussie against the US, you obviously wanna make sure your capital's balancing the risk-weighted assets you've got against your US portfolio. Other than that, I guess that's the answer to the question.
I think as our foreign income grows, we try to match our funding as well in those currencies. Basically, we haven't, you know, adjusted for FX rates. The Aussie's been up to parity and down to 50 cents over the years, but we've still managed to deliver these mid-teens ROEs.
Should say 1%-2% pre-profit share, pre-tax.
Yeah. Yeah.
Yeah.
Right. We've got a few questions on the line, so we might go to the phone line, please.
Thank you. Your first question comes from Andrew Lyons with Goldman Sachs. Please go ahead.
Thanks and good morning. Just a question on your outlook. You've noted that while realizations in MAM and Macquarie Capital were strong in the first half, they appear to be largely done for the year with certainly much lower levels expected in the second half. Therefore your divisional guidance would appear to imply a reasonable step down in NPAT for 2H versus the first half. To the extent that this is a fair characterization, can you perhaps just talk to the extent to which the expected step down in realizations in the second half is cyclical or structural, and therefore what it might mean for looking into FY 2024 and beyond?
Yeah. Thanks, Andrew, for that. The realizations in both Macquarie Capital and Macquarie Asset Management are lumpy because basically we're realizing assets at whatever the time is to get the best return for that asset. If we have to wait three years, we wait three years. If it's worth doing now, we do it now. As you've seen historically, there's been quite a bit of lumpiness. In Macquarie Asset Management, mentioned that the performance fees will probably be higher in the second half than the first. It's just the timing of when the assets are realized.
We had a big Green Investment Group realization in the first half, and when we look at the pipeline of when the best time is to keep running off that Green Investment Group balance sheet, we don't see things to that extent that we'd realize in the second half. Same in Macquarie Capital. We had a real estate asset we held for I don't know how many years. I know Michael Silverton's on, but five years at least. This was the best time. We've been working on it for a while, that we realized in a digital infrastructure couple of assets as well. It really is driven by, I don't know that it's cyclical.
It basically is when is the best time to realize the asset, and we will take into account external market factors in that, but also very much what's happening with the business. Have we driven the change that we want to get it to the point where it makes sense for us to exit and let somebody else then own that business? In terms of cyclical versus structural, you know, the environment, we've had these environments before, ups and downs. Macquarie Asset Management, Ben Way's on the line. I know it's early morning for him, but I might let him speak briefly.
We're sitting with AUD 30 billion of dry powder, and I think we're going to be, as we always have been, very disciplined about when we invest it, when we realize assets, all driven by long term, how do we get the best return for our investors in these funds and keep our franchise going? Ben, are there any cyclical points you want to comment on? Or structural?
I think, Shemara, the point is that I think we all acknowledge that the environment is a bit more challenging than it was 12 months ago. I think as you can see from, say, our fundraising, there's still very strong support for people wanting to be allocated from, in terms of our client base to things like real assets. We continue to see very strong support for all our funds in the marketplace, and we expect that to continue through to the rest of the year. Equally, I think there's also still significant investment opportunities for us despite the changes in the macro environment, particularly around energy transition and digitalization. As a consequence of that, there's also still strong demand for our assets.
I think you've made the right point, Shem. We are disciplined. We do take a medium to long-term view. Our job is to make sure that we get the best returns for clients. You know, we remain optimistic about the market, both in terms of deployment opportunities but where it makes sense from a realization point of view. There remains very good appetite for people to be allocated to particularly things like real assets.
Yeah. Overall, for the Macquarie Group, I guess we don't put any pressure on Macquarie Capital or Macquarie Asset Management to be realizing in a period. Because the group's diversified, and as you can see in a time like this, the commodities business is contributing strongly, the banking business is contributing strongly. We can empower them to be realizing assets at the best time for the return on that investment.
That's really helpful. Thanks, Shemara. Just a second one. Just despite a difficult half in the MacCap business, I know you did continue to invest in the franchise, which was a bit of a drag on the profit contribution. Just, I guess, with Green Investment Group now out of that division, can you perhaps just talk in a bit more detail about where you see the opportunities within MacCap and where that elevated investment or the step up in investment is being particularly focused on?
Yeah. I'll let Michael Silverton, who's on, comment in a minute as well because he's dialed in from the US. Basically, there's still a lot of opportunity to support the deep expertise of our bankers with balance sheet across Macquarie Capital. The private credit book we talked about that's now at AUD 15 billion and is investing principally in North America, is about 58% of that book, and then Europe, another big part. Australia, Asia is smaller. And then I think there's four areas in equities where we invest. We've got the tech sort of venture style early stage investing, which we've been doing for a long time, as you know, and had some excellent investments there. There's the growth equity that we invest in the Americas, principally, which is, government services types, safer, you know, really revenue generating businesses.
A little bit further along the growth curve that we have great track record and a deeply expert team. We have our infrastructure and energy principal investments. We've done a few PPPs. You've seen the Maryland DOT, the Pennsylvania DOT that we've done recently. Then in our private credit principal finance team, we also do investments in more mature equity positions. Energetics was an example of that we've done. There are four areas. Basically, we look for areas where we have some deep specialist expertise relative to the market, and we support those people. They're very disciplined in their investing.
A lot of what we're doing is bilateral proprietary investing, and the risk management team, you know, which Andrew Cassidy heads up, sits very strongly alongside them, and we've had decades of, I think, investing in all these four areas. Michael, any comments you'd like to add?
Thanks, Shemara. The only comment I'd add is that offshore, we're still relatively small in terms of our market share. In those sectors that we focus, there's a lot of opportunity. From a principal standpoint, we're still seeing opportunities from a growth perspective. Private credit is growing as a sector and our share of that market continues to be there. We continue to see good opportunity across the board. As we become more international in these sectors, there's cross-border opportunities as well that we can benefit from. Clearly, the capital markets have been challenging for us over the last period.
You can see that the reduction is smaller than what you would have seen in the broader market, and that's in part because our scale is such that we can focus where we see the opportunities.
Yeah, those are all good points. Thanks.
Thank you very much. Appreciate it.
Thank you. Your next question comes from Ed Henning with CLSA. Please go ahead.
Thanks for taking my questions. Just my first one, a little bit of follow-up just on the equity investments. If you look at all the categories there on slide 39, can you just touch on where you're actually seeing pricing pressure on the market at the moment, where you've taken some impairments, and also which categories, you know, you still have really strong demand if you were to realize them in the current marketplace? As a first question.
Alex, did you want to take that?
Sure. Just a couple of things. Probably the most obvious area of pressure, not just for us, but generally has been in the technology sector. I think you're seeing that's been pretty widely reported. That's probably the area where there's most pressure. That's the first thing. Secondly, you know, most of these things, Ed, as you know, we hold an amortized cost, so we don't remark these things through the balance sheet. In many cases, they're quite seasoned investments, so they're probably in the money in the first place. Look, the level of impairment that we saw coming through the first half was pretty modest.
I think you know I made the point that there was, as is sadly often the case, there's one or two positions that are underperforming their expectations and we take the impairments. It was a relatively light half in terms of impairments coming through. Look, in terms of the underlying story, obviously, you know, I think Ben touched before on the infrastructure spaces. It really continues to be strong demand for infrastructure assets. You know, particularly they tend to offer a higher yield and in some cases are inflation protected. You know, I don't think we're seeing anything from a transport industrial infrastructure perspective.
The PPP sectors that Shemara talked about before, you know, for the similar reason to the infrastructure space, we're seeing good demand there. Digital infrastructure, I made the point that we obviously divested of a digital asset in Europe during the period, and divested well. We actually invested in a new digital asset over the period, so we feel good about, you know, where pricing is there. Green energy, we're not really seeing any sort of softness. Generally speaking, I think we're not seeing that many impairments come through, and again, we don't mark these things to market on the way up, so we wait to divest them, generally speaking. Not seeing much impairment.
As I said, probably the area of pressure more generally is on the technology side, but that's really reasonably well telegraphed. Obviously more generally, Ed, as you know, it's a pretty diverse book. So that's sort of where we're at. What is happening, you know, to the capital markets point that Michael made, you know, with the capital markets slowing down, that tends to slow down transaction activity levels. Just financing to make the acquisition work tends to be harder to get. People are more cautious about proceeding. Often, as you see a downturn, obviously purchasers and vendors have a different view of price expectations, so it takes a while for that to normalize.
Okay. That's great. Thank you. Then just a second one on GIG. Obviously you're having no issue raising money. Can you talk a little bit about the ability to deploy the money? You know, are you actually seeing red tape being reduced for developments by governments, or is that still talk? Then the other part of it is the new funds that you're raising, are you still taking all the development risk, or are you gonna start to see GIG actually in the funds take some development risk and therefore take the profits with that as well?
Yeah. GIG, the investment environment is still huge. I think, Justin Moffitt was talking earlier about the energy transition, and we're seeing, you know, ultimately what we need is massive investment in solutions if we're gonna transition off the conventional ways we deal at the moment with energy, transport, agriculture, buildings, industry, et cetera. The capital requirement is massive. We're fortunate in that we have a team with very, very deep expertise to respond to some of that. We're seeing governments respond all over the world. You saw the Australian budget allowance for it. The U.S. has introduced this new, they call it an Inflation Reduction Act that has a $360 billion allocation to climate transition investments, in addition to another $110 billion that was allocated in the Infrastructure Investment and Jobs Act.
A huge scope of projects are now being developed in the U.S. Here in Australia, for example, we've been involved in onshore wind, solar, hydrogen projects, Evie's, Evie charging. Offshore wind is now becoming a big area. There is a massive pipeline of opportunity to respond that is getting government support to catalyze it in the developed and the developing world, and a lot of interest from private sector investors, either strategics to partner with us or financial investors to invest. We're seeing a good pipeline. If anything, the biggest constraint we have is the capacity of our team because, as I said, we're very disciplined about building out the scale of our business based on the scope of our expertise. We are seeing, with the Green Investment Group, good opportunity to keep getting invested.
Sorry, there was a second question as well. Did I answer that as well in terms of GIG?
Just deploying the money on the floor.
Yeah.
Yeah. Sorry.
Just about the development risk.
Oh, right. Yes. Sorry. Yes, you did ask about that. Yeah. Look, I mean, we started out investing in operating assets, then we moved to late stage construction, then to earlier stage construction, and then to development as the returns kept being brought in in each part of the spectrum. We did end up building up a lot of development skills. Corio I mentioned is the offshore wind platform. We have a lot of deep development expertise there, and we're finding that's where you are getting rewarded, but it's higher risk. What we've got for our investors is a spectrum of offering, where the more operational, lower risk assets that command lower returns as well will be offered in one portfolio, the Global Renewable Energy Fund portfolio and series.
The earlier stage assets, which still won't be completely beginning stage, we're doing in this MGETS offering. As time goes on, I'm sure that will get compartmentalized into other series as we respond to the market opportunity.
You'll still be using your balance sheet in GIG to seek some development gains to seed into funds.
It's-
as well as some funds taking that from scratch?
That's probably right. Basically, if an investment falls in the mandate of the fund, we will do it in the fund. The balance sheet will not compete with the fund mandate, but there'll probably still be areas. For example, some of the early hydrogen projects we're doing here, Macquarie Capital is playing a role with the balance sheet as well as Macquarie Asset Management. There'll be areas that are still balance sheet areas as well. Probably the vast majority of the big balance sheet will move over to the fund. We have several billion AUD at the moment in Green Investment Group assets, and over the next few years, that will have run off to much smaller amounts.
Obviously we'll continue to.
That's great. Thank you very much.
We'll continue to make green investments in the funds themselves, so we'll have an interest in those assets.
Yeah.
through our limited partner interest, but less directly.
In development stage as well, the checks tend to be small, so that'll probably be the trend.
Still got a few more on the line.
Thank you. Your next question comes from Andrew Triggs with JP Morgan. Please go ahead.
Thank you. Good morning, Shemara and Alex. First question just relates to Macquarie Asset Management, and it's a follow-up really on the private credit portfolio. If the net interest income in that, in Macquarie Asset Management was actually quite subdued, but there was reference to some mark-to-market losses on underwriting positions. Firstly, sort of keen to just get an understanding of how big those are and more generally those underwriting losses, and more generally, I would assume that spreads have widened quite materially in the private credit market. I'm sort of keen to get some sense of what underlying growth in NII on the Macquarie Asset Management portfolio's been in the half.
Yeah. I'll give some comments and hand over to Alex, but I think we need to distinguish between the private credit portfolio and the underwriting business, which is a debt capital markets business. The provisioning we did was in the debt capital markets business where we do underwrite to syndicate for a short period. Private credit we invest to hold, and typically, we're terming out the funding of that as well to match the term of the investments we make, so we will have fixed in the spread subject to credit. We've obviously been taking a lot of ECL provisioning on the private credit book as it grows, and once it matures and stabilizes, we should see more stable income come through in that private credit book.
Okay.
With that, I'll hand to Alex to talk about.
Yeah. I mean, in terms of the margin, we talked before, Andrew, about, you know, basically, we've seen a NII margin of sort of 4.5%-5%, you know, for the last few years. That continues to hold. You know, you probably saw from the results, if you look at the AUD 3.6 billion I talked about, AUD 2.5 billion was invested in the Q1 . So the growth in the private credit book for the latter part of the half was quite low. The reason for that was the point I was making before that it takes a while obviously for markets to adjust to the new reality.
What we are seeing, what we're starting to see is a bit of an expansion in the margin on the private credit side as credit more generally becomes harder to access. That's obviously good in terms of the going forward. Shem said, we lock in the term funding against the asset anyway, so we've locked in the spread on those assets that we have on the balance sheet. In terms of the portfolio itself, I mean, obviously create ECL when you originate assets. You know, over time we've had, as I've said before, we've had a few assets that we've had to impair. You know, they've been in idiosyncratic situations.
Obviously, you recall the COVID story with the cruise line where we lost some money on that exposure. You know, there are some assets which underperform from time to time. Generally speaking, you know, the credit profile of that book is strong and the underlying credits are performing well. Yeah, we did see a deterioration in the macroeconomic outlook over the half, so we've stepped up our ECL provisioning for that. You know, as you know, we hold an overlay in our ECL of about AUD 490 million. Some of that's obviously related to the principal finance book.
Effectively that's, I guess, us forming a view as to, you know, what that deteriorating macroeconomic outlook does to the loan portfolio across the group. Generally speaking, it's, you know, it's well-provisioned and, you know, we feel good about the sectors where that,
Thanks, Alex. Second question just on the performance fee outlook. Taking account what's been said about the second half, it would seem like the performance fee take as a percentage of EUM will probably run at half what it has been over recent years. Just keen to get your thoughts on maybe beyond the second half, what sort of 2024 might look like and whether we could realistically expect that to maybe not head back to the 50-55 basis points level of the past, but something closer to that.
Yeah. Look, the performance fees, as a % of equity under management, and the same for base fees, I think have come down a bit since we shared information some years ago, about five or six years ago. I think the big driver there is the diversification of where our equity under management is. As we have more money in equity in businesses like private credit, real estate, the base fees on those are at a slightly lower level than the infrastructure funds and the performance fees as well. In private credit, we don't have performance fees. That's what's bringing the average down. I think it's important to share that certainly in the infrastructure funds, we're seeing no pressure on fees. Our funds are closing at their hard caps oversubscribed, and we're not getting challenged on the fee levels.
We are increasing the percentage of co-investment. That brings fees down a bit, but we get more capital deployed more quickly. I think we'll see both base fees and performance fees on EUM come down, but it's not really because we're having to take lower fees per dollar of EUM in each of the asset classes we're in. We're just diversifying into adjacent asset classes that carry a lower fee per EUM on them. We think that's worthwhile doing. We're trying to broaden and diversify our franchise and go into adjacent areas patiently. On performance fees in the infrastructure funds, we're still seeing similar IRRs on the funds and rates of performance fees, et cetera, depending on the region and the mandate of the fund. We're also doing some slightly more core infrastructure funds, which get performance fees on yield.
I guess my short point of view is we're not seeing pressure on the fee margin per product. It's the mix of product that's changing things.
Maybe just to ask a little bit more generally, Shemara, is 2024 likely to be a slightly stronger period for realizations just given timing of fund maturities?
Yeah, we have MIP III and MIP IV going through their realizations at the moment, and we have assets to be realized in those years. They're probably the main contributors, aren't they, Alex? Ben is on the phone as well. As Alex has been saying and everyone's been talking about the environment for realizations, we don't know what that will be like. We should still see good demand. There's a lot of dry powder in infra funds. The sort of strategic buyers our assets still have a lot of interest, and the assets have improved a lot in terms of their results. We should see reasonable realizations in FY 2024 similar to this year, I think. Possibly a little more. Yeah.
Thank you.
Thank you. Your next question comes from Brendan Sproules with Citi. Please go ahead.
Good morning. I have a couple of questions in the asset management business, specifically the movement in the assets under management that you show on slide 26 today. My first question is just in the public investments business. It does show that you had slightly positive net inflows over the half. I was wondering if you could talk about the drivers there. Obviously, Waddell & Reed had had significant outflows in the years prior to your acquisition, so I'd like to understand how that business is faring and also some comments on the net inflows in the Delaware business, please.
Yeah. In the public investments business, what we've been seeing is pretty much what the market's been seeing over this six months, which is a rotation to fixed income from equity. We did have good inflows into fixed income but, offset by outflows out of equities. The fact is that the fee margin in equities is higher than in fixed income, so that has an impact on base fees. I think the much bigger driver of base fees, obviously, is that equity markets have come off about 20%, and that's, as we've said in the results presentation here, the big driver of what has impacted assets under management and base fees in the business. Waddell & Reed integration is going well, so we're on track, a little bit ahead of track in terms of bringing that business together.
Same with the AMP Capital business here and same with the CGM business. As you said, Waddell & Reed was already in outflow, and we are working with all our distribution teams as well as LPL in a backdrop environment where equity markets have come off and outflows from equities are increasing to try to, you know, bring down outflows in Waddell & Reed in line with our acquisition case. Does that cover it?
I think. Yeah. No, that's fantastic. If I could just ask a similar question in the private markets business. The interesting thing about the flows there is you show that in investments of almost AUD 23 billion would be probably well above average of what you've shown in previous periods, where divestments seems well below. I think as interest rates start to flow into valuations over time, is it likely that we will see an expansion of equity under management and assets under management in private markets because it'd be a lot easier to deploy given the flow that you've had for investors, but divestments will be a lot more challenging.
Yeah. Look, structurally, I think Ben Way was saying that when he spoke. We are seeing institutional investors, be it pension funds, insurers, allocate much more now to private markets. They used to, you know, in the very early days, have a 60/40 fixed income equities, public markets allocation. I think they're finding not only can they get better alpha, but they can get better matching of duration, et cetera, for their liability by putting it more into private market assets. We're finding that is creating in the industry good demand for private market strategies. If you look at macro data, you'll see flows and fees, particularly going much more to private markets from public markets. Even though ETFs are growing in size, the fees are very low there. I think private markets is where the fee flow is.
For us specifically, as I've been saying, it's all about being able to bring superior expertise and results in each of the subsectors we're in. Infrastructure, we're still the largest manager in the world. We have good track record in the funds we're investing in, so we should continue to see flows there. In terms of having to allocate more through this cycle to things like utilities or transportation assets where you can pass on the infrastructure and have some sort of protection.
Thank you. It's very helpful.
We've just got one more on the line.
Thank you. Your next question comes from Lara Tuvedek with Bank of America. Please go ahead.
Hi. Thank you for answering my question. I was just wondering, having completed the Waddell & Reed acquisition earlier this year, would you consider further acquisitions of active asset managers? If so, what asset classes and geographies might be appealing? Thank you.
Thanks, Lara. Yeah, we hadn't done many acquisitions since 2009. I think we'd done small things like the ValueInvest Asset Management team, et cetera. We'd bought in boutique teams in areas where we saw a gap in our capability. A large platform acquisition like Waddell & Reed, we only did last year, and that's because it's rare to be able to invest in those accretively, especially in the cycle we had with EBITDA multiples getting up to about 12x. Now they've come off clearly quite a lot and I guess I'd say high-level in the U.S., we have now a platform, so we can do more in-market acquisitions of other managers in public investments like we did in Waddell & Reed.
In Europe, we don't have a presence, so we would have to find a much more compelling case 'cause we couldn't take that benefit of integrating the platform costs and getting the synergies. We're not present in the European market. We'd be open to something, but in our usual very, very disciplined way, and that's why these sort of inorganic steps are rare for us.
Thank you.
Thanks, Lara.
Just gonna go to the room, and then we'll come back to the line.
Right. Brian's been waiting patiently.
Never patient, Shemara. Brian Johnson, Jefferies. I have three quick questions which I suspect will not be answered, but they've got to be asked. The first one, you've got to remember, this comes in the context of a rather disappointing result yesterday that management were telling us was great, but perhaps wasn't. If we have a look at your downside scenario in your ECL provisioning, and it's refreshing to see someone where the provisions aren't effectively being written back from where they were in COVID. Alex, the one number that you don't share, which is really important, can we get the unemployment assumption in Australia that you're using in the downside scenario?
Having told you you're not gonna answer the question, Alex.
Yeah. I'm just saying that house prices falling don't create loan losses. Unemployment and the house prices falling create loan losses.
We might come back to you.
It's not an unreasonable question.
Brian, we're happy to give you the economics forecast, but I think we're probably in the mid-fours in terms of unemployment. We can come back to you.
It says 4.6% is the base case.
Yeah.
We can come back to you.
I'm interested in what the downside one is.
We'll have to come back to you with the exact numbers.
We're happy to share.
I think you should share it with everyone. It's a big-
It's just the economics forecast anyway, so we're happy to.
Yeah.
Happy to share it, but I think Greg would endorse that unemployment's a driver. Sorry, Greg, did you have a comment?
Yeah. I can't remember the number either.
Yeah.
You're right, I mean, the answer is right.
Yeah.
Yeah.
We're happy to give you the answer, but we'll have to after here in terms of the answer.
Fantastic. Well, don't give it to anyone else.
We'll put it on the website.
Okay. The second one is that when we have a look at the legendary slide 39, we can see that there's AUD 1.1 billion of seed assets in MAM, which includes Green Investment Group. Down below it, we can see there's green energy investments of AUD 1.3 billion. Could we understand what the difference between those two are? Is this where MacCap buy stuff and are speculating it's gonna go really well or what's the difference between those two?
The green asset portfolio, the green energy portfolio there is principally what was in the Green Investment Group. That's now gone into MAM. That's the Corio asset that Shemara talked about, Blueleaf, and Cero, a few other platforms they've got. The investments acquired to seed new private market assets. There'll be a small component of green energy in there, but you know, the team is actually out there putting their foot on, I don't know, in the past, National Grid, for the sake of example, in the UK. It'll be those sort of things that'll find their way into. In that case, it was the Macquarie Super Core Infrastructure Fund. Here, there's you know, a range of secondary investments. There's a range of investments there that'll find their ways into non-green assets.
There'll be some small exposure to green, but principally green's in the likes of green energy.
That AUD 1.3 billion, that's destined ultimately for a MAM fund?
Well, yeah.
I guess what we're doing is what we saw during this half. There were some assets that were sitting on the balance sheet that you saw coming through the MAM P&L. Those assets have just been sold to third parties. There's still a portfolio of assets, some of which is the offshore wind asset that Shemara talked about. We've got a solar platform. The team are working their way through whether those assets are sold to third parties or whether they form seed assets in a new green energy fund. The discussion, Brian, is a bit. If they're embedded with large profit, then obviously, you know, the shareholders of the group have taken the risk to get to that large profit, and we wanna get a proper return for that.
We don't wanna sell them into the funds at that elevated price because that conversation's a hard one to win. You either pay too much in the fund, or you sell them too cheaply for the group. Where they're not, you know, invested with large profit, then typically they might form a seed asset for the fund. Where they're invested with large, you know, embedded profit, then maybe they'll come off the balance sheet and go to third parties. That conversation is a live conversation, and it'll take, as we've said before, a few years to go from the balance sheet investing to that large scale fiduciary offering that Ben and the team are putting together on the MAM side, MAM private market side.
The final question, I promise I'll shut up after this one, is, you know, we hear a lot about interest rates going up, asset values fall. In the private markets business, when Macquarie bought an asset 10 years ago for one of the funds, we know that the assets tend to be inflation protected, and we know that you tend to term out the funding for the life of it. When you're terming out that funding, do you term that out with infrastructure linked debt rates or naked debt at the time? Because it will have a radical difference on the end value of the asset. As inflation comes through, if you've termed it out with debt where it was, there's a gigantic capital gain as inflation comes through. Could we just understand what it is predominantly?
Yeah. I mean, there's obviously 160 assets in the portfolio.
Yeah.
There won't be one answer to that question. Some of them will be inflation linked, you know, swaps that have been put in place.
Yeah.
Typically speaking, what they'll have done is they'll have termed out the debt, and they'll have turned it into fixed rate debt. It won't be inflation linked debt. To the point you're making, you'll obviously have an expansion to the top line, and you might have the cost of the debt fixed for a period of time. Remember, the buyers of the assets are obviously raising the funding in that inflationary environment. Yes, they get the top line. Their cost of capital is going up. It's not as simple as saying you've got nominal growth at the top line and you've got this fixed cost there. That to some extent will be happening. You do get that expansion.
Equally, you've got to obviously find a buyer market, and the buyers have got to go and raise their funding and get their return for risk that they're taking as well. There's not a simple answer to the question.
I think also our leverage across those assets is sitting at around 50%. We're pretty prudent on levering those assets. Having been through a cycle previously, over a decade ago, where, you know, you could actually turn good assets into risky ones through leverage if you had to refi in a cycle where there's no liquidity. We've been pretty prudent on the debt, that we put in, and as a result, the costs of debt are pretty. You know, they're not egregious debt where your spreads are getting high.
Thank you very much, and congratulations.
Right. We've got one more question on the line, we'll go to the lines, please.
Thank you. Your next question comes from Brett Le Mesurier with Perpetual. Please go ahead.
Thanks very much. I'll make this quick. You commented that you were moving away from mature investments more towards in development assets to improve the ROE. I'm interested to know whether the ROE you get on
Development assets now is better than the mature asset ROE investments that you were getting, say, five years ago. In other words, are you being compensated for the extra risk you're taking now compared to the returns you're getting, say, five years ago on the mature assets?
Yeah. Thanks, Brett. I just qualify that that was just in the green investment assets that we were talking about, where we'd moved up the risk curve more to development assets. I think the returns have come down across that space because more and more capital is chasing it. The returns for mature assets have come down, but even the returns for development assets, as people have got more familiar with it, but also as people are wanting to allocate much more to the space. We, as I said, are pretty disciplined asset by asset. If we don't think the return is there for the development risk, we'll go and apply our skill sets in another area where there isn't as much compression of return for the development work you're doing.
As some of these development areas get de-risked, we'll move to other development areas where we see the spread for the risk that we're taking. Hopefully that answers it.
Just one more quickly on the ROE. You commented on your ROE hurdles by division and how they varied. When you look at your incremental investment, do you look at the incremental ROE or do you then, you're actually looking at the average division ROE when you're making your decisions?
We look at it investment by investment. If we're looking at a new investment, we won't subsidize it by superior ROE we may be having in a similar nature of assets already on the book. We're very disciplined about each particular investment operating like it's the only investment. It may get cost synergies and things from other investments, and we'll factor that in. Ultimately, everything's got to stand on its own. We don't feel any compunction to put money out the door. We're happy to sit on our capital in the funds and on the balance sheet if we're in an environment where there are no good opportunities and wait for the right time.
That concept applies to the smaller assets, the home loans, for example, which you have in BFS?
Yes. Greg's sitting here nodding in front of me. That's very much the case that we don't need to put capital out of the door if there isn't good return on putting that capital out of the door.
Thank you. All the questions I have.
Great. I should say as well as you know, Greg and Nick and Ben and Michael who's been, we've also got EV, our general counsel here in the front row for our group, Nicole, our head of corporate operations, and Andrew Cassidy, our head of the risk management group with us who didn't get to speak today. Stuart Green's not with us, but the rest of the executive committee are.
Great. All right. Thanks, Brett. Thanks everyone for your support and interest, and we'll look forward to seeing you over the next couple of weeks. Thanks very much.