Ann: Response to Media Speculation, page-67

Well hang on, we do know a few things, BLA have disclosed them:

1. They were artificially inflating valuations to write fees that were never collected. This is true. Hence why there is a massive write off.

2. BLA have form in only announcing good news and trying to hide the bad. This is a massive trust issue for investors. In you invest in unlisted funds, trust is critical. All organizations like this dud products from time to time, how you deal with them is the deciding factor. If you try to hide them from view, then people distrust you and it will impact your ability to raise new funds. Hiding bad news is modus operandi for Blue Sky. Review all of the BAF monthly reports, its all about how well everything is going, no updates on under performing funds. It wasn't until the Gluacus report that the market found out about the issues with the EC2010 fund.

3. Glaucus accusation: Blue Sky has grown its profit by writing inflated valuations, booking uncollected profits and these funds will never be collected. The changes to the accounting systems will essentially show BLA is unprofitable. = CORRECT. BLA have acknowledged this - hence the writedowns. There is a 50million impairment as a direct result of this accusation.

4. Blue Sky was hiding dud investments on the books refusing to exit them to maintain the existing valuations so that they didn't have to disclose the impairment. The AFR has had a running commentary on the sale process of the child care group. BLA knew - knew full well - that they were carrying that at an inflated valuation. While they had it for sale and couldn't sell it, they still lifted the valuation by 16% (go back and check the BAF disclosures - its there early 2017) and still couldn't sell it. They skipped the 2018 valuation against policy and then after the Glaucus report, they sold it for a massive write down in May 2018. That is clear evidence that they were creatively disclosing material information.

In terms of the ponzi scheme. Well, Blue Sky booked fake profits, never to collect that cash, raised funds and then paid a dividend - all in mid 2017, call that whatever you want. But coming back to your real question, the AFR is accusing BLA of running a ponzi scheme in Water. No i don't think thats a ponzi scheme at all - what i do think is that their involvement has artificially inflated the market and its more a bubble than a ponzi scheme. If you look at the actual returns from water based on the BLA valuations, they are getting like a 2% to 4% return on the asset valuation from farmers to use the water (this was based on feedback from a farmer i met who buys water). Now you cannot find that out unless you can see the valuations and what farmers are paying for the water and there is a reason that Blue Sky don't talk about current returns or actual real data. Its all about averages and half speak (ie they tell you enough information to look like they are telling you something, but they actually told you nothing). Even Blue Sky acknowledge (albeit indirectly) that they are concerned about a bubble in water - thats why they are no allowing additional money into the fund and all redemption's are paid for by new investors. Read their reports and their public comments. Its over valued and will correct when people realize. Whenever its about to drop in value they buy more rights and that is what the valuations are based on. Blue Sky has admitted that they represent 20% of the transactions that the valuations are based on.

Also don't forget the issues raised in the Gluacus report are not new. They have actually been around for years. But everytime that an analyst tried publish a negative report on the operations of the company, BLA threatened legal action. All of the accusations are supposition because the BLA accounts are so complex literally anything could be happening there, if you believe Gluacus that is by design, if you believe Blue Sky its because nobody cared enough (seriously look at their commentary immediately after Glaucus - accusation by external parties, BLA your financial accounts are too complex, BLA response, Large institutions place money with us, they don't seem to think so)

Seriously look at their performance in the last 6 months:
a. 110 million spent
b. Lower FUM
c. 50+ million negative impairment

Shaw and Partners is the only firm still recommending this as a buy and even they have dropped their 12 month price target to $2.50. Morgans has finally jumped ship and called it a SELL - because there is too much risk on the ongoing viability of the business.


Seriously people, this organizations whole business model is, raise capital, use capital to seed funds, grow FUM. That is the model, irrespective of your positive or negative view of the firm. The business has historically needed every $ and more of management fees to operate so there is no organic growth of the FUM. So, when BLA run out of the cash in the bank, they have 2 choices (literally just 2) - raise more cash to continue to grow FUM OR stop growing FUM. In an organisation like this if the FUM stagnate and they stop going to the market, other people will attract the capital and BLA will slowly but surely fade away.

That is all assuming that they can bring their operating costs to under recurring management fees - which is a stretch.

The only real saving opportunity for BLA is if the Australian economy improves substancially and that drives the performance of their investments, but I don't see that happening any time soon.

Consider this though, with a falling property market and BLA having circa 50% to 70% of their investments exposed to property, well, there are even more tough times ahead for those investments, whats going to happen when those valuations keep falling????? Are BLA going to disclose this or hide it again??? I've heard of 3 of their recent Equity investments, all terrible speculative investments, all sold on the basis of trust me, we got this - thats why they are struggling to raise money for them, thats why they are so expensive to run, they have to pay massive fees to their team of capital raisers just to get them to make the calls.

RE- student accommodation. Ask your self this questions, at what point are students going to stop paying $300 per week for a bed in a room with 1 or 2 other people when they can rent an 2 bedroom apartment and share it for $600 / $700 per week? The student accommodation model has been over played (there is a place but too many people are entering the market chasing quick $) and will come back in valuations in the not too distant future - its a bubble.

In closing I think Gluacus was half correct, there was something off with the valuations of BLA, thats a given. But what it has also shown to me is the cultural problem with BLA, when asked a direct question, they deflect - not answer it. Thats all good and well, when you on the upswing, but when your on the down swing, thats death. BLA need to sack the current Managing Director combined with all of the senior executives from before Glaucus and bring in new external leadership - that is critical.