Blue Sky Alternative Investments hopes to close a deal with Oaktree Capital to invest in the business “imminently,” interim managing director Kim Morison has told Agri Investor, with the firm set to rebrand in an attempt to rebuild its reputation.
Morison was speaking as Blue Sky announced its annual results for FY18, revealing an underlying net loss after tax of A$85.6 million ($61.8 million; €53.1 million) and underlying revenue of A$24.9 million. That compares with A$25.5 million in profit and A$68 million in revenue in FY17.
The real assets business, which includes the firm’s agricultural and water assets, has achieved overall yearly returns of 23.2 percent, net of fees, in the five years to June 30, posting 75 percent growth in fee-earning assets under management in the last year alone, to A$991 million.
The firm said its results, which it described as “disappointing,” were caused by negative market sentiment as a result of the short-selling campaign launched by Glaucus in March 2018, as well as the need to incur one-off costs associated with the restructuring of the business and impairments to several assets in its portfolio.
Talks with Oaktree Capital are still ongoing, with the firm set to provide capital for co-investment and expertise in managing private investments as a listed entity.
Morison said the benefits from the Oaktree agreement would primarily come in helping to convince prospective LP clients that Blue Sky is in good shape, with Oaktree coming on board only after conducting extensive due diligence on the firm’s business structure and investments. “Reputationally, this is an important thing for us and it’s going to help us to grow quicker than we otherwise would,” he said, adding that Blue Sky hoped to be in a position to announce a deal “shortly.”
On reputation, Blue Sky announced that it would “pursue a rebranding of its investment management business.”
“It has to be more than just a new name, it has to stand for something different and be something where we can clearly distinguish the team and say ‘that was past, this is who we are now,’” Morison said. “That piece of work is under review – I’m not enjoying the Google risk.”
The write-downs and impairments came as Blue Sky shuttered its hedge fund business and wound up several regional real estate development projects, as well as terminating or deferring some student accommodation and retirement living projects.
“It’s been a bit disappointing for us to be hijacked by other parts of the Blue Sky business”
None of the impairments came in Blue Sky’s agricultural or water portfolios, which sit in the firm’s real assets division, a part of the business Morison used to lead before stepping up to become interim MD this year.
“It’s been a bit disappointing for us to be hijacked by other parts of the Blue Sky business that hadn’t necessarily got to that stage of maturity and development around institutional growth, infrastructure and client base,” he said. The firm would focus on real assets, particularly Australian agriculture, he added, as well as continuing to explore opportunities in mid-market private equity and the student accommodation sector in the country.
Blue Sky’s Strategic Australian Agriculture Fund reached a second close on A$210 million earlier this year and that capital is now around 70 percent deployed. Morison said he had hoped to reach A$300 million with that fundraising, but the firm had decided to focus on deployment and improving its reputation before returning to the market, despite interest from several LPs.
“We need to fix up the reputational issues with Blue Sky if we’re going to go and attract them, and while they’re certainly still a warm prospect, we need to be demonstrating to them that everything’s cleaned up,” he said. “So whether they become a late entry to this strategy, or a cornerstone in the next offering, we’re still yet to determine. But we are definitely keen to pursue the strategy and replicate it with a Fund II and a Fund III in time, and so forth.”
Morison said he expected Blue Sky Agriculture Fund I to be wound up and proceeds distributed in Q2 2018.
The Blue Sky Water Fund also achieved striking annual returns, net of fees, of 27.6 percent. Prices for water entitlements and allocations in the southern Murray-Darling Basin, which the Water Fund targets, have hit record highs in recent weeks as ongoing dry conditions begin to bite.
Despite some market observers questioning whether entitlement prices can continue to rise, Morison was bullish on the prospects for investors in the Water Fund. “We do see there’s still scope for growth in certain areas that are exposed to high-value agricultural development, like almonds, or wine grapes, or citrus.”
“As [the region continues to] transition to high-value ag, those scarce water supplies will get priced to a level that represents whatever returns those farmers are generating. And I still think that’s got a way to run yet, as the capital is now being expended to grow those orchards out.”
“I’m not going to say that we’ll get 27 percent every year. We budgeted on getting 10 percent: 5 percent out of yield and 5 percent out of capital growth, and we’ve been running quite a long way ahead of that. But there’s still growth to be had because we can’t create more [water].”
The firm said in its results that redemptions from the Water Fund reached 14 percent of its deployed capital between March and June 2018 following the short-selling campaign, but these were “readily funded” from the fund’s cash reserves and a progressive draw-down of capital commitments previously secured from institutional investors.