The key allegations by Glaucus Research that Blue Sky needs to answer

Fred Dufour/AFP/Getty Images
  • Glaucus Research says Blue Sky charges management fees as high as 17%
  • And the market capitalisation of Blue Sky is overvalued by about 77%.
  • Blue Sky allegedly “unjustly” inflates its reported fee earning AUM.

Blue Sky shares are under voluntary suspension while the ASX reviews the fund manager’s proposed response to a brutal note by Glaucus Research.

The underlying issue is that Glaucus Research values Blue Sky’s assets under management at $1.5 billion while the company itself puts this at $4 billion.

However, Blue Sky says: “From its initial review of the report, Blue Sky notes that there are a large number of factual inaccuracies throughout, including the assertions raised in relation to how Blue Sky calculates and reports its fee-earning assets under management, its investment performance and its fees.”

The company also notes that the report includes the following statement: “You are reading a shortbiased opinion piece. Obviously, we will make money if the price of Blue Sky stock declines. The report and all statements contained herein are the opinion of Glaucus Research Group California, LLC, and are not statements of fact.”

The claims raised by Glaucus Research, a Californian-based short seller, in its research note:

    1. “Blue Sky Wildly Exaggerates its Reported Fee Earning AUM.”
    2. “Evidence that Blue Sky misrepresents the performance of its investments.”
    3. “Blue Sky Gouges Australian Investors with Extortionate Fees.”

The Glaucus adjusted share price for Blue SKy is $2.66, 77% below the current share price of $11.43.

Here’s how Glaucus calculates that 77% drop:

“That said, we believe that this valuation is likely far too generous to the company because it gives full credit to Blue Sky’s reported performance on its portfolio, which we believe is significantly overstated,” writes Glaucus in its note.

“We therefore think it would be reasonable for investors to value Blue Sky’s shares even lower. Where the bottom is, perhaps not even Blue Sky knows.”

Glaucus says its believes Blue Sky has been overstating its financial performance by aggressively marking up the value of its unrealised investments.

“The higher Blue Sky’s management marks its unrealised assets, the more performance and management fees the company can ‘recognize’ in its financials,” writes Glaucus.

“The more fees it recognises, the larger the company’s reported profits, and the higher its share price.

Glaucus says marking up the value of its assets also allows Blue Sky to claim “fantastic” investment returns, which Blue Sky uses to attract new investors, pushing up assets under management and increasing the company’s share price.

“This creates a feedback loop by which management can enrich themselves simply by pushing for the markup in value of unrealised investments,” says Glaucus.

Glaucus demonstrates this with the following flow chart:

Source: Glaucus Research

Glaucus says Blue Sky “unjustly” inflates its reported fee earning AUM (assets under management).

“Our analysis shows that Blue Sky was overstating its real estate AUM in its prospectus by including the gross value of the properties and not, as is proper, simply the value of invested capital,” it says.

It gives this as an example:

Glaucus says Blue Sky reports the AUM of the project at $100 million, including both the $30 million in invested capital and $70 million in debt borrowed from banks.

“To our knowledge, no other asset manager defines fee earning AUM in this way,” says Glaucus.

“We contacted the leading asset managers who invest in private equity, real estate and alternative assets, including KKR, Apollo and Blackstone.

“Each of them defines fee earning AUM as the fair value of their invested capital and not the gross value of assets, companies or real properties.

“Blue Sky can’t claim this is some sort of Aussie quirk, because ASX listed asset managers Magellan Financial and Rural Funds also use the proper definition of fee earning AUM as the fair value of invested capital.

“By overstating its fee earning AUM, we believe that Blue Sky not only defies standard reporting practices followed by major publicly listed asset managers, but it unjustly inflates the Company’s stock price.”

Fees

Glaucus says only the world’s best fund managers can charge a 2% management fee and a 20% performance fee.

“Yet, hidden in the fine print of Blue Sky’s investment documents, we discovered that Blue Sky consistently charged Australian investors extortionate management fees as high as 17%,” it says.

“These are not performance fees tied to the success of the investments. Rather, Blue Sky charges such fees up front and labels them as management fees, establishment fees, due diligence fees or other advisory fees.

“Not only are Blue Sky’s ludicrous upfront fees an abusive practice that gouges the very investors Blue Sky claims to serve, but Blue Sky’s revenues will continue to shrink as it runs out of suckers to pay such exorbitant fees.”

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