Courier Mail article:
http://www.couriermail.com.au/busin...e/news-story/14fb842b3cf615b533033f070d3e0909
Blue Sky hit with Glaucus Research short-selling attack, shares in BS Alternative Investments dive
Liam Walsh, The Courier-Mail
FUND manager Blue Sky Alternative Investments’ stock was pummelled after a short-seller claimed the Brisbane-based company was inflating asset values and charging “extortionate fees”.
Some of the short-seller’s claims were disputed by people named in the research. Blue Sky, whose accounts are flagged as giving a true picture of the business, meanwhile locked its shares in a trading halt while it tried preparing a detailed rebuttal.
“From its initial review of the report, Blue Sky notes that there are a large number of factual inaccuracies throughout,” the company told the stockmarket. This included assertions about the calculation of fee-earning assets under management, investment performance and fees, Blue Sky said.
The attack by California-based Glaucus Research, which makes money when shares fall in target companies, marks the latest short-selling activity against Australian stockmarket listed businesses. Glaucus were also behind devastating research into sandalwood grower Quintis last year.
Blue Sky started from a private operation in 2006, has dozens of funds and listed a main investment vehicle on the stockmarket in 2012 with shares at $1. Stock in November last year reached a high of $14.99, but were chainsawed by $1.03 to $10.40 on Wednesday after Glaucus released its research.
“We think that it’s a very opaque company, and they’re deliberately opaque,” Glaucus director of research Soren Aandahl told The Courier-Mail.
“They do not make it easy for investors to check their disclosures.”
One of Glaucus’s arguments was that Blue Sky tells investors it has $3.9 billion in fee-earning funds under management, but in reality Glaucus estimates only $1.5 billion qualifies as such.
Glaucus said as an example that they believed Blue Sky would claim a real-estate project was worth $100 million, even if only $30 million was invested and the rest covered by bank loans. “No other asset manager defines fee-earning assets under management in this way,” Glaucus said.
They also questioned Blue Sky’s claims of returns being 15 per cent. “If such returns are true, Blue Sky is one of the best asset managers in the entire world over the last decade,” Glaucus said.
CLAIMS REJECTED
The short-sellers also cast doubt on the 2015 sale of portable toilet company Viking Rentals, in which a Blue Sky fund held a stake and was sold for $11 million upfront to Adelaide-based Bayfront Capital Management.
Glaucus alleged that due to several factors, such as Bayfront lacking a website and being based at a home address, it raised suspicions that “perhaps Blue Sky (or investors affiliated with Blue Sky) were really behind Bayfront”.
That was rejected by Bayfront’s sole director Daniel Hill. “I can assure you that it was a valid transaction. (The investors) have no relation to or association with Blue Sky whatsoever,” Mr Hill told The Courier-Mail.
He said Bayfront was an investment vehicle actually owned by two unit trusts.
“They’re (Glaucus) going down the wrong hole on that one,” he said.
Glaucus also questioned why Blue Sky founder Mark Sowerby sold a large chunk of his shares — 3.4 million of 8.4 million, for $26.9 million upon retiring as managing director in 2016. “If Sowerby had confidence in Blue Sky, he would not have exited such a large block position so quickly,” Glaucus alleged.
But Mr Sowerby denied the allegation. He had earlier invested his savings into Blue Sky and the initial sale was to build up the family’s financial balance sheet, he told The Courier-Mail.
“The shares that I retained and continue to retain in Blue Sky (represent) more than two-thirds of our personal wealth,” he said. Any other sales just covered tax expenses, he said.
“This is a good business full of good people,” Mr Sowerby said.
‘ABSURD’ VALUATION
Glaucus claimed that Blue Sky’s investment in childcare operation Foundation Early Learning was now held at an “absurd” valuation, partly given lower margins than other players. A sale process for that operation has dragged past expected deadlines of a sale last year.
Blue Sky’s investments in Beach Burrito, with about a dozen outlets, were valued at a “massive premium to more established, fast-growing brands”, at almost $5 million per restaurant, Glaucus alleged. Tweaking this valuation would inflate Blue Sky’s overall performance, Glaucus alleged.
Short-sellers have previously targeted Blue Sky before. Some market watchers have also been cautious given the difficulty of valuing some assets in its portfolio, because values are often for assets in which there is no readily available public market on which to base prices.
But Blue Sky has previously maintained valuations are appropriately checked, it uses independent valuers and rejected notions that it avoids selling struggling assets.
Still, Glaucus claimed that Blue Sky was overstating its record of actual sold assets, which are returns of 16.7 per cent since 2006. “In order to boost credibility, we believe that Blue Sky has sold … its successful investments while it keeps the failures on its books,” Glaucus alleged.
“The result, we believe, is adverse selection in which Blue Sky’s portfolio becomes increasingly dominated by its duds.”
Glaucus alleged that Blue Sky’s fees were as high as 17 per cent, including “ludicrous” upfront fees such as due diligence or establishment fees.
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