Will Oaktree’s investment be enough to save Blue Sky?

Blue Sky Alternative Assets has endured a torrid few months Down Under since US short-seller Glaucus published a scathing report about the company’s business model and practices in April. While many of the criticisms turned out to have a fair bit of substance, Blue Sky’s agricultural and water portfolio emerged relatively unscathed.

Those investments still look sound and Blue Sky has repeatedly said that its institutional clients in that real asset portfolio have been happy with the returns achieved. This is backed up by comments recently made to Agri Investor by Mark Hector, First State Super’s infrastructure and real assets portfolio manager, who said that its investments with Blue Sky were performing well and remained “relatively immune” from the problems experienced elsewhere in the company.

Crucially, though, Hector also said that reputational risk was a big factor for an industry superfund like First State, and that the controversy swirling around Blue Sky over the past few months meant it had put a pause on future investments. Market sources have indicated to Agri Investor that it isn’t the only LP with this view.

This is where Oaktree’s recent A$50 million ($36 million; €40 million) investment into Blue Sky via a convertible loan note comes into play.

Blue Sky interim managing director Kim Morison (who previously oversaw the firm’s ag and water investments, suggesting that he was doing something right there to be given the job to oversee the firm’s recovery as a whole) told us in August that the Oaktree investment was very important to help the company’s reputation recover. The fact that Oaktree had done extensive due diligence and decided to make a move proved that there was still something of value in Blue Sky, which could help reassure both existing and prospective LPs.

Blue Sky is also working through a potential rebrand of the business, though Morison said in August that this wouldn’t involve Blue Sky becoming an Oaktree brand.

Despite that, the terms of the loan note do mean that it’s possible, if not inevitable, that Oaktree could take over the Blue Sky business at some point in the next couple of years. The firm is not known as a philanthropic investor; it will be dead set on securing a return on the investment it’s making.

Investors, then, are still unsure as to what the future holds for Blue Sky – as are shareholders, with the share price still sitting stubbornly below A$1.50 at time of writing. Blue Sky’s upcoming AGM on November 19 looks like an increasingly important date for management to lay out what they see as the benefits from Oaktree’s involvement and how the company will move forward.

A rebrand alone is unlikely to be enough to assuage worried investors – but more substantial changes to the business, such as an Oaktree takeover or even just the beefed-up and more independent board that has been proposed, could make a bigger difference.

Investors would rather do without the inconvenience of either switching manager or trying to take the ag and water investments in-house. In addition, nearly all without fail have good things to say about the people in charge of those investments, including Morison, who is now at the top of the business. But this equally translates into irritation that his time is being taken up on other things.

Several sources within Blue Sky have expressed frustration to Agri Investor at how the good work they felt they were doing in ag and water has been undone by the poor investments in other sectors that were highlighted by Glaucus and focused on by the media.

The challenge for Blue Sky now is to make the case to existing investors that their capital invested in real assets is safe – and more problematically, to make the case to new investors that this is a company worth doing business with.

That pitch may become easier after Oaktree’s involvement and a potential name change, but it’s clear that the company still has a lot of work to do.

Write to the author at daniel.k@peimedia.com