Blue Sky managed many funds - a macro-futures fund, a big fund trading water rights, a venture capital fund - and the funds were sold to investors (mostly retail, some institutional).
Blue Sky claimed to have $3 billion under management on which they collected base and performance fees. They only had about 100 staff at peak.
And they went bust.
The official story - promoted by several members of Blue Sky Management - is that Blue Sky was a fine institution - but reliant on public trust - and it collapsed because of a misleading short-seller report. They think that the collapse of Blue Sky was akin to a run on a bank. Lies were sufficient to cause the demise of an otherwise sound institution.
This is not obvious from the accounts. And it assigns magical powers to short-sellers that I did not know I had. (I am a short-seller.)
I do not know what went on at Blue Sky beyond what is in the accounts - but just the accounts are fascinating enough.
Here is a quick run through them:
The Blue Sky 2014 Annual Report
The 2015 Annual Report
The 2016 annual report
Operating cash flows in the year were $13 million so the bulk of operating cash flows were invested in Blue Sky funds. Their past investments did well too.
The 2017 annual report
The retirement villages are the Aura village – but even that was doing well as they booked an increase in fair value.
We know these funds were eventually returned as Blue Sky sold the Aura projects. This was after the final 2018 annual report as per this press article.
You will note that this lists the specific investments. They are quite profitable (with $8 million of appreciation). Net additions were about $9 million (25 additions, 15.9 disposals). They were continuing to pour money into their investments. As their investments were profitable this seems a good thing.
The 2018 annual report (also the final annual report)
The Chairman described the year as Blue Sky's annus horribilis.
That said the financial position is pretty good because they raised $100 million in cash from shareholders just before the Glaucus short-seller report came out. This extract makes this clear:
Note that the investment in retirement villages is now $112 million and the investment in associates is $46 million.
This time they made modest losses, booking 6 million in losses and partially reversing the prior year gains. They did however make net additions absorbing some more of the cash they raised.
Presumably these investments were there at the end too.
What happened next?
- a) The cash raised was invested in funds that remained there when Oaktree put the firm into liquidation – and Oaktree wound up for $50 million with investments that had about $200 million in cost. Oaktree made out like bandits.
- b) The cash raised and the accumulated profits were invested in Blue Sky funds – but that Blue Sky is such an atrocious investor that $200 million in investments at cost were not enough to repay Oaktree on liquidation or
- c) The investments were never made – and were fictional from inception. The cash raised wasn’t invested. It was diverted for purposes unknown. And likely the profits that Blue Sky booked along the way were fictional.
The second explanation - the one that management lost all that money - is the most innocent of these. Loosing money is a pity, but it is not a crime. [That explanation is also difficult for Blue Sky management who wish to stay in the asset management business without a tarnished reputation.]
I do not have any access to Blue Sky's liquidation reports or internal accounts. But ASIC has been made aware of this analysis - and if by this time next year we have not seen an answer to where the $200 million raised went to then I will be disappointed.
I wrote this all out because I am a little off-put by the negative press that short-sellers have received here - even though - on the face of it it looks like a cool couple of hundred million (a quarter of a billion including the Oaktree loan) have just gone missing.
But at this point Blue Sky has gone to zero. It is not up to short-sellers to explain what really happened. That is up to Australia's corporate regulators.
This is a really important case for them.