Blue Sky 2018 loss: $86m in red ink, Oaktree seeks tough terms

UPDATED: Blue Sky is considering dumping its name after an “annus horribilis” in which the former star of Brisbane’s fund management industry lost $86m.

Brisbane-based fund manager Blue Sky says it has had an “annus horribilis”. Picture Peter Wallis

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BLUE Sky is considering dumping its name after an “annus horribilis” in which the former star of Brisbane’s fund management industry lost $86 million.

“Our financial result has been dreadful, our reputation has been materially diminished and market sentiment has collapsed,” Blue Sky Alternative Investments chairman John Kain wrote in the company’s annual result.

But Mr Kain argued the company planned to build a stronger future and had retained the support of key institutional clients.

Blue Sky oversees more than 85 funds, ranging from student accommodation to an online shoe seller. The company sprouted into a market darling after 2012 by claiming resounding successes on the values of these funds.

That faith was shattered in March when a short-seller, who makes money from stock prices falling, issued a devastating critique that alleged the performance had been manipulated. While Blue Sky rejected that assertion, some funds have subsequently dropped in value such as ones for online footwear selling operation Shoes of Prey, which ceased trading this week.

HANDING BACK FEES

Problems came home to roost in full-year accounts filed on Thursday. Blue Sky took the odd step of reversing revenue — returning almost $18 million in management and transaction fees after cancelling some development projects.

It also set aside $28 million against potential problem loans made to Blue Sky funds that had been “going through challenging periods”.

Costs jumped from $46.1 million to $98.2 million, including the costs of hiring lawyers and retrenching staff.

The accounts showed Blue Sky’s former CEO, Rob Shand, who quit in April, received $582,000. That included $331,000 in termination payments, which included his contracted entitlements and unpaid leave.

Revenue, meanwhile, plummeted as Blue Sky held off raising capital for new funds.

“Underlying” earnings went from a $25.5 million profit in 2017 to a $85.6 million loss. On a statutory basis, earnings tumbled from a $20.7 million profit to a $67.6 million loss.

“There wasn’t much to like about (the result),” Blue Sky’s interim chief executive officer Kim Morison told The Courier-Mail.

“This is resetting the company. So we have reviewed (the) entire portfolio. We’ve made some hard decisions.”

He said one positive outcome was a 75 per cent jump to $1 billion in funds managed for real assets, which can include farming-related businesses. That included large institutional investors still backing Blue Sky “through all of this noise”, he argued.

But he said the name Blue Sky was under consideration, given the fallout from what he argued was a small number of underperforming funds. “It’s not just about a change of name. It’s obviously about looking at what do we stand for and what are we going to be focused on in the future,” he said.

The market blanched at the result, with shares closing down 22.5c to $1.63. They were trading at $14.99 in November last year.

ASIC PROBE ‘NO THREAT TO INVESTORS’

The accounts confirmed threats to Blue Sky: three class-action law firms are circling while the Australian Securities and Investments Commission examines the company’s disclosures.

Mr Morison maintained Blue Sky had met its obligations about disclosures.

“I don’t think it’s a threat for investors at all, really,” Mr Morison said of the ASIC probe.

“In the last three years, there have been hundreds of (ASIC notices demanding information) issued to companies, and very, very few of them that actually go through to any prosecution.”

Blue Sky has not yet been served with any class-action lawsuit.

Simon Theodore, a lawyer with Gadens, told The Courier-Mail that his firm continued to investigate the possibility of legal action. Everyday retail shareholders and institutional investors had made queries, he said.

OAKTREE DEAL

With pressuring mounting in the year, Blue Sky has been seeking financial support and in talks with Oaktree Capital, a fund manager known for tough negotiations.

Blue Sky said on Thursday an offer tentatively included Oaktree providing $60 million via financial notes that can be converted into shares. Any conversion of notes to shares would be capped at one-third of the Brisbane company, and Oaktree also wanted a spot on Blue Sky’s board.

Blue Sky’s accounts highlighted that returns to investors in funds since inception was 13.9 per cent annually. That figure has proved controversial with market sceptics because it includes estimates on the performance of assets that are yet to be sold, and some of those assets have been downgraded in value in the past six months as scrutiny intensified.

That included five of its heavily marketed student-accommodation funds dropping in value. One 283-bed facility in Brisbane’s southside suburb of Woolloongabba fell by 35 per cent.

While some sector sources had fretted about an accommodation glut for some time, Blue Sky’s accounts said Brisbane City Council incentives to encourage development “resulted in a wave of new (student accommodation) opening at the same time, which has impacted operational performance in the short-term”.

Occupancy levels had been lower than expected but now exceed 80 per cent across Brisbane, the accounts said.

VALUATIONS DEFENDED

Mr Morison defended the overall valuation process, saying independent experts were used. He also maintained the vital factor for investors was the final price when assets in a fund were eventually sold.

“When we exit the business, that’s when they will get paid a return and likewise we will be paid, if we’ve done a good job … a performance fee,” he said.

On that basis, he said investors in funds where the assets have been sold received an 18.7 per cent annual return.

One of the criticisms of Blue Sky is the claim that it avoided selling troubled assets to avoid posting bad results, although the company has rejected that allegation.

Blue Sky’s stockmarket listed fund, the Alternatives Access Fund, revealed that insurers this month wanted to jack up rates to provide cover for the fund’s directors. “The updated program carries insurance premiums that are a significant increase on the prior period,” the accounts said.

The fund’s profits fell from $13 million to $5 million.