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What you need to know:

* Blue Sky Investments is a Queensland investment company that convinced punters it was some sort of expert on real estate, agricultural assets and venture capital. 

*  Blue Sky overpaid for assets, then sold its few well-performing assets to allow it to mark up the older, dud assets which it retained … some may call this a Ponzi scheme in that new investors’ money is used to cover up the terrible returns being earned. 

*  This appears to be Blue Sky’s business model: make a dud investment (using other people’s money), and in the process charge literally millions for transactions fees, equity raising fees, M&A advisory fees and administration fees.

*  Blue Sky’s current business cannot possibly survive as it depends on ripping out as many fees as possible from investors. Without punters’ money, the business will likely very rapidly implode, and investments will be sold for a fraction of their book value.

*  Australian Financial Review columnist Tony Boyd authored a series of fawning — and embarrassing in hindsight — Blue Sky articles, writing that “Blue Sky is well on the way to meeting its target of having $10 billion in funds under management and being the home-grown version of Wall Street alternative asset giants Blackstone and KKR.”

*  One person who may not be as bothered by the disaster is the bloke initially responsible for the mess, Blue Sky founder and former CEO, Mark Sowerby, who resigned and sold 46% of his stake in September 2016, collecting more than $27 million in the process (before amusingly being appointed Queensland’s chief entrepreneur). He defended the company saying “this is a good business run by good people“.

The full story:

For those who don’t follow the world of short-selling and funds management, you may have missed almighty fight breaking out between embattled Brisbane-based fund manager Blue Sky Investments and US-based activist investor and short-seller, Glaucus.

A few weeks ago, Glaucus launched a scathing attack on Blue Sky, claiming it had (among other things) massively overvalued its investments and that it had short sold Blue Sky’s shares (more on that in a second). Blue Sky hit back claiming Glaucus was wrong. As it has transpired, Glaucus may have actually been a little too nice to Blue Sky, as there is almost no doubt they are cooked and will almost certainly be dead within a year.

Following the great tradition of fellow Queensland-based gems Quintex, MFS and City Pacific, Blue Sky somehow convinced punters that it was some sort of expert on real estate, agricultural assets and venture capital. It’s hard enough to be a great investor in one area, it’s pretty much impossible to be great at such diverse areas. Blue Sky appears to be a dud across the board.

Glaucus’ thesis is essentially that Blue Sky overpaid for assets, then sold its few well-performing assets to allow it to mark up the older, dud assets which it retained. Some call this a Ponzi scheme in that new investors’ money is used to cover up the terrible returns being earned. Glaucus used public information to make its case (which appears credible). Blue Sky then did itself no favours by failing to address any of the substantive points made by Glaucus, refusing to outline the basis for its allegedly inflated valuations.

Blue Sky came to this writer’s attention a couple of years ago after it invested in ecommerce wine business Vinomofo (it is the smallest part of the business’ portfolio). Your author knows the founders and the Vinomofo business well. Justin Dry and Andre Eikmeier did a superb job after buying the business back from Catch of the Day for a few million dollars and growing it in a super competitive space to a business worth upwards of $20 million.

In February 2016, Blue Sky bought a 22% stake in Vinomofo on a jaw-dropping $100 million valuation. Tellingly, Blue Sky was the only investor in Vinomofo (most VC funding rounds have multiple investors), presumably because every other investor globally thought the valuation was utterly insane. Within just months, Vinimofo massively missed Blue Sky’s revenue estimate and continues to burn through cash. Nevertheless, Blue Sky actually increased the carrying value of Vinomofo in its books, claiming a 9.3% rate of return.

But the kicker is not only did Blue Sky completely botch its investment (and then claim the value somehow increased), it also took a bucket-load of fees in the process. This appears to be Blue Sky’s business model (following the grand tradition of Babcock & Brown, Allco and MFS). Glaucus calculated Blue Sky’s fee take was 14% of capital raised. For example, for its Vinomofo investment, Blue Sky charged an incredible $3.9 million in fees for its $23.9 million investment, which might explain why it paid so much: it simply didn’t care.

Vinomofo was far from Blue Sky’s only dubious investment. It spent $4.5 million acquiring a stake in Parcel Point/Fluent Retail. Fluent insiders told Crikey that Blue Sky did not speak to a single director before making its investment, raising serious questions on its ability to conduct even the most basic due diligence.

Even more amusingly (albeit not for its investors), Blue Sky paid $22 million for a 74% interest in Foundation Early Learning — a debt-laden childcare centre operator that appears to be close to insolvency and which industry experts told Crikey was worth far less than what Blue Sky paid. Despite the business appearing to be worth very close to zero, Blue Sky actually increased the value of its holding by a comical 42% since 2014.

On April 6, after the Glaucus report was released, Blue Sky told shareholders that it had been “attacked by a foreign activist investor [and] the only long-term solution to this attack is to continue to demonstrate the performance of our business … while this occurs, you may rest assured, that our business is in good shape.”

Less than two weeks later, a less confident Blue Sky told shareholders that “underlying NPAT guidance [is being reduced] for FY18 from $34-36m to $20-25m” and that “it is clear that Blue Sky has fallen short of market and shareholder expectations around transparency and disclosure.”

Blue Sky’s share price has crashed by around 75% in recent weeks, from $11.50 to only $3.63. Will the next stop be zero?

 

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.

Peter Fray

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