Warnings on Blue Sky Alternative Investments have been around for a while

THE warning signs that all may not be right in the house of Blue Sky Alternative Investments have been around for quite a while.

Illustration of Mark Sowerby by Brett Lethbridge.

THE warning signs that all may not be right in the house of Blue Sky Alternative Investments have been around for quite a while.

The question is why it took a metaphorical hand grenade lobbed by US short-seller Glaucus Research Group last week to shake the now-beleaguered Brisbane fund manager to its very core.

As Blue Sky suffered a horror run on the ASX this week, it became apparent that much of the criticism levelled by Glaucus had first surfaced years ago.

Glaucus alleges that the company has inflated the value of assets under management, misrepresented the performance of its funds and gouged investors with excessive fees.

Blue Sky, which was founded by former Queensland chief entrepreneur Mark Sowerby, adamantly refutes those claims.

As long ago as 2014 a finance sector blogger slammed the company for allegedly revaluing assets at will, paying management fees to itself and promoting questionable performance metrics.

“The annual reports of Blue Sky are a maze of related party transactions and interests’’ and its balance sheet “is bloated by related party crossholdings, loans, intangibles and receivables,’’ he claimed.

More authoritative criticism came in late 2016 from respected Diogenes Research, which alleged that several of Blue Sky’s private equity businesses had “very stretched’’ balance sheets and were highly leveraged.

Indeed, the report questioned the sustainability of the company’s business model. But Blue Sky boss Rob Shand returned fire, saying the study contained factual inaccuracies.

Then last September it emerged that one of Blue Sky’s funds had been struggling to the point that it asked investors to keep their money parked for another year and they agreed.

HARD TO UNDERSTAND

ALL these red flags didn’t go unnoticed by Brisbane’s finance sector players.

“I always found it difficult to understand their accounts and I used to lecture in accounting. So I was always a bit leery of them privately’’ one of these gents told City Beat yesterday.

“I was one of hundreds of investment professionals around Australia scratching my head at how the accounts were put together.’’

Another industry figure told us they had similar apprehensions.

“We were always concerned because their fees seemed exorbitant and they would bring forward profits and keep raising money, which is not a sustainable business model,’’ he said.

MORE CLASS ACTION

MEANWHILE, the list of law firms running the ruler over a possible class action against Blue Sky on behalf of aggrieved investors keeps growing.

Shine Lawyers got on the bandwagon this week, joining Gadens and Piper Alderman which are also sifting through mountains of material before deciding whether to proceed.

Shine operative Vicky Antzoulatos noted that Blue Sky claims to have $4 billion in fee earning assets while Glaucus alleges the actual value of the assets is only $1.5 billion.

“The company has a statutory duty to factually report material information to the market,’’ she said.

“A breach of this duty could give rise to a class action by shareholders.’’

SURVIVING STORM

SO where is all this head-spinning Blue Sky drama heading?

City Beat sources say they think the company will ride out the storm but, fairly or not, it could take many months or even years to repair the reputational damage.

They say it’s quite possible that institutions and other co-investors on projects with Blue Sky could get cold feet and walk away.

Also in the short term, the company needs to get on the front foot and lift its investor relations game.

It took days for Blue Sky to respond to the Glaucus bombshell and, even then, Shand wouldn’t take questions from analysts after reading a 19-minute speech. Many found that pretty underwhelming.