Australia is one of the cheapest places in the world to raise capital courtesy of Paul Keating’s superannuation revolution and the Babcock & Brown empire is second only to Macquarie Bank in terms of tapping into the flood of money.
Today it was hedge fund play Everest Babcock & Brown Alternative Investment Trust (EBI), managed by the associated Everest Babcock & Brown (EBB), which received approval from its owners to raise up to $500 million — $250 million by way of a placement to new investors at $4.27 and another $250 million in a one-for-one entitlement offer at $4.07. The stock is up 3c at $4.40 this afternoon.
EBI is only capitalised at just $267 million before this mega-raising, but will now be a similar size to its more valuable manager, EBB. The families of EBB managing director Jeremy Reid and his father-in-law, Steven Eckowitz, own 40% of the company which is worth $283 million based on today’s market capitalisation of $708 million. Babcock & Brown has 29% of EBB worth $205 million. The secret to their wealth is ripping out fat fees from EBI where they have much smaller exposures.
All of today’s capital raising is by EBI and this alone will trigger an additional $10 million in base management fees for EBB, which also gets a performance fee of 20% of everything above a 10% return.
EBB are so sensitive about this deluge of fees that they’ve come up with a most unusual structure that sees each new investor in EBI get one free EBB share for each 4-5 they take up. This has attracted loads of institutions to line up for the $250 million EBI placement at $4.27, but the EBI stock is expected to slump when they sell down after receiving the free EBB shares.
I was the only shareholder who spoke at the 25-minute meeting and engaged the board for about 15 minutes. There was no explanation given for the sudden resignation of recently-appointed independent director Olev Rahn, a doyen from BT during its glory days but chairman Trevor Gerber was generally helpful in his answers and there were plenty of sharp suits happy for a chat afterwards.
As usual with Babcock, the related party transactions and conflicting investment opportunities are flying in all sorts of directions. Underwriters UBS and Macquarie Bank (the first time a Babcock vehicle has ever used the Millionaire Factory to raise equity), have decided to pay sub-underwriting fees to Babcock & Brown CEO Phil Green, who didn’t bother to show up at this morning’s meeting but personally owns 656,028 EBI units worth $2.89 million.
This afternoon at 3.30pm I’ll be hitting the Magellan Financial Group EGM to put investment bankers Hamish Douglass and Chris Mackay, and their new independent chairman Dick Warburton, through their paces.
Malcolm Turnbull must be regretting having to sell most of his old Pengana vehicle at $1.40 when the stock is now north of $2 after James Packer and friends backed what is being billed as the next big thing in funds management.