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When Will Blue Sky's Horror Run End?
BY DAVID BUCKLAND - 11/05/2018 | VIEW MORE ARTICLES BY THE MONTGOMERY TEAM

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BLA - BLUE SKY ALTERNATIVE INVESTMENTS LIMITED


In March, US hedge fund, Glaucus, went short on Blue Sky Alternative Investments (ASX:BLA) due to what it perceived as exaggerations in the fund manager’s fee-earning assets under management. Since then, things have gone from bad to worse for BLA investors. And the bad news shows no signs of abating.

Three weeks since the last underlying earnings downgrade, by 36 per cent to a mid-point of $22.5 million for the year to June 2018, the Board of Directors have withdrawn their guidance, “by taking prudent account of recent developments”.

In addition, Chairman John Kain has announced he is throwing in the towel. Alexander McNab will retire from the Board effective immediately as well as from his role as Chief Investment Officer. And Executive Director Tim Wilson will retire from the Board but remain as Managing Director of Blue Sky’s Private Equity business.

Meanwhile, over at AMP, newly installed Chairman, David Murray, is on the look-out for some Directors following the departure of Catherine Brenner, Vanessa Wallace, Holly Kramer and Patty Akopiantz. It’s raining Board renewal!

But back to Blue Sky, where the company expects to complete the sale of 4-5 (of its 80) investments prior to 30 June 2018. In the case of Foundation Early Learning (FEL), it stated that “it is estimated that the sale proceeds will represent a discount to carrying value of between approximately 14-23 per cent”.

One thing that has become clear is the $4.0 billion of assets under management includes $380 million of drawn debt and $764 million of undrawn debt. Private Equity accounts for $558 million or 14 per cent of the gross assets, Real Assets (mostly agricultural) accounts for $885 million or 22 per cent, Private Real Estate accounts or $2.0 billion or 50 per cent, and the balance accounts for $567 million or 14 per cent.  Readers should be aware that over 85 per cent (or $981 million) of the $1,144 million of drawn and undrawn debt is against assets in the Private Real Estate division.

And a final piece of insight – the company is adjusting its fixed costs so that recurring management fees exceed them.  We await the audited results to June 2018, and the guidance for Fiscal 2019, given the introduction of AASB 15 Revenue from Contracts with Customers will see revenue (and performance fee) recognition more closely align with the “cash basis” of accounts. Interestingly the Blue Sky performance fees have averaged $17 million since Fiscal 2014. In the past, Blue Sky has accounted performance fees on an accrual basis rather than cash basis and this lack of conservatism promotes a highly fluid situation for earnings guidance.



View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



 

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