Blue Sky attacked for ‘wildly exaggerating’ asset values by short-seller

Blue Sky Alternative Investments is misleading investors and its stock is overvalued by more than 70 percent, claims US short-seller Glaucus.

The Australian asset manager “wildly over-exaggerates” its fee-earning assets under management, which include holdings in agriculture and water, according to a searing report published by the hedge fund.

Glaucus also claimed Blue Sky had been overstating its financial performance by “aggressively, and unjustifiably, marking up the value of its unrealized assets.” It criticized Blue Sky for what it called “extortionate fees.”

In agriculture and resources, Glaucus estimated that Blue Sky’s assets under management are worth “at most” A$315 million ($242 million; €196 million), 68 percent less than the company’s reported A$975 million.

Sizzling sizing-up

The hedge fund examined each of Blue Sky’s agriculture funds in turn and estimated their worth. Glaucus’ research stated that Agriculture Fund I invested in Gundaline in March 2014 via Southern Agricultural Resources, with Southern purchasing Gundaline for A$25 million.

News reports at the time said Southern was backed by undisclosed “overseas investors,” but Glaucus claimed that disclosures from another Blue Sky vehicle show this investor is likely to be the asset manager itself. Based on Blue Sky’s stated internal rate of return of 16 percent for agriculture and resources assets, Glaucus found an AUM value of A$44 million as of December 31, 2017.

For Agriculture Fund II, Glaucus said the fund had only invested in Hillston Circus, an irrigated citrus orchard in New South Wales. It had an AUM value of A$14 million as of December 31, 2017. Similarly, Glaucus said Agriculture Fund III’s only investment was in Kialla Pure Foods, a flour processing facility, in May 2016, for 33 percent of the company. Again, assuming the 16 percent IRR, it estimated the AUM value of AFIII to be A$15 million.

On the Blue Sky Premium Beef Development Fund, Glaucus obtained a document from May 2017 that claimed to show A$10.465 million had been raised for the fund. Assuming the IRR of 16 percent, this values the fund at just over A$11 million.

Glaucus’ calculations of AUM also included the Strategic Australian Agriculture Fund, which Blue Sky is the process of raising. It is hoping to raise A$300 million in 2018, but Glaucus said it found two commitments to SAAF worth A$81 million, which it has included in its A$315 million valuation of agricultural and resources AUM for Blue Sky.

Suspended trading 

On management fees, Glaucus criticized Blue Sky for “gouging” Australian investors with what it called “extortionate upfront ‘management’ fees as high as 17 percent.” It called this an “off-market, abusive and unsustainable practice.”

A trading halt was placed on Blue Sky’s shares yesterday, which had fallen to A$10.40, down from A$11.40 before the publication of the report. Glaucus valued the company’s shares at just A$2.66 and claimed that even this was probably too generous “because it gives full credit to Blue Sky’s reported performance on its portfolio, which we suspect is inappropriately exaggerated.”

Glaucus added: “Where the bottom is, perhaps not even Blue Sky knows.”

Blue Sky provided an initial response following the trading halt on Wednesday, stating that there were a “large number of factual inaccuracies” throughout Glaucus’ report. In particular, these related to the assertions made about how Blue Sky calculates and reports its fee-earning AUM, its investment performance and its fees.

Blue Sky said it will provide a fuller response to the market before the resumption of trading, which is set to come on Tuesday following the Easter weekend.

The asset manager’s founder and CEO Mark Sowerby resigned in September 2016 after cashing out a significant number of his shares.

In its most recent half-year results for H1 2018, published on December 31, 2017, Blue Sky reported total fee-earning AUM of A$3.9 billion, revenue of A$51.4 million, and EBITDA of A$22.3 million, all increasing by more than 40 percent year on year.

Blue Sky declined to comment. Glaucus had not responded to a request for comment at the time of publication.