Shares in Australian asset manager Blue Sky are in a trading halt after plunging on a brutal analyst's note

(Photo by Ryan Pierse/Getty Images)

Blue Sky has gone into a trading halt after California-based Glaucus Research disclosed it was short the fund manager, arguing it had been “significantly overstating” its fee earning assets.

Before Blue Sky went into a halt, its shares plunged 13.4% to $10.40.

Glaucus says it is short Blue Sky Alternative Investments and values the shares at $2.66, or about three-quarters lower than recent trading levels.

Blue Sky’s shares have been surging over the past year, from below $8 at the start of 2017 to above $14 at the start of this year. Back in 2013 shares traded below $1.

“We believe Blue Sky $BLA compensates for its overstated fee earning AUM (assets under management) by charging clients egregious management fees,” said Glaucus in a series of tweets today.

“Based on our analysis, we estimate that $BLA Blue Sky’s real fee earning AUM is at most $1.5 billion, 63% less than Blue Sky’s reported figure.

“Over time, when Blue Sky $BLA inappropriately inflates the value of unrealised investments, its receivables balloon with uncollected performance and management fees and cash flows deteriorate despite record paper profits.”

After putting its shares into a trading halt around lunchtime AEDT, Blue Sky issued the following statement later in the afternoon:

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.

Blue Sky 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.’

Blue Sky will provide a response to the market on the issues raised in the report prior to the resumption of trading of shares in BLA and the Blue Sky Alternatives Access Fund Ltd (ASX: BAF). BLA and BAF will remain in a trading halt until that time.

Glaucus offered an example of its calculation on how Blue Sky valued 12 beach Burrito restaurants at $60 million. “Would you pay $5 million for one of those restaurants?” says Glaucus.

Blue Sky requested a trading halt “so that the Company can review and respond to a research report”.

The research note by Glaucus says Blue Sky has reported an impressive 15% IRR net of fees since inception in 2006.

“To put this in context, if such returns are true, Blue Sky is one of the best asset managers in the entire world over the last decade,” writes Glaucus.

“But there is good reason to be suspicious.”

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Since inception, Blue Sky has only exited 39 investments, an average of three to four a year, of which a large number have been residential property developments around Queensland.

“As a result, the vast majority of Blue Sky’s reported performance is based on the markup of unrealised investments still lingering in its portfolio,” says Glaucus.

“We believe that Blue Sky has been overstating its financial performance by aggressively, and unjustifiably, marking up the value of its unrealized assets.

“Our thesis is based on two categories of evidence: the first is the Company’s consolidated financial statements, the second is documented examples where Blue Sky has, in our opinion, clearly overstated the performance and value of certain investments.”

Valuing real estate

Glaucus estimates that Blue Sky’s real estate AUM (assets under management) are no more than $683.5 million.

“Reputable asset managers, including KKR and Blackstone, define fee earning AUM as the fair value of invested capital,” says Glaucus .

“We believe that the company reports real estate fee earning AUM as the gross value of the assets, including the indebtedness on its property developments. By doing so, we believe Blue Sky vastly overstates its reported fee earning AUM.”

According to Blue Sky, real estate related investments are about half its fee earning AUM. Glaucus says this should mean the value of invested capital in the properties is $1.9 billion.

“But based on our review of Blue Sky’s real estate portfolio, including residential developments, student accommodations, retirement homes, commercial property and other related investments, we believe that Blue Sky is reported the gross value of its investments as its AUM,” Glaucus says.

“In our opinion, Blue Sky overstates its real estate AUM by at least 2.9x.”

Last month Blue Sky notified the ASX that an entity controlled by Blue Sky director Tim Wilson disposed of 150,000 shares in BLA at $11.50 per share, for a total transfer value of $1,725,000.

In the six months to December, Blue Sky reported a 21% fall in net profit after tax to $8.5 million. Total operating revenue was $39.16 million.

Fee-earning assets under management were reported to be $3.9 billion at the end of December, an increase of close to $1.2 billion over the last twelve months.

Growth in fee-earning assets led to a 41% increase in underlying revenue to $51.4 million, including a 48% increase in management fees to $23.68 million.

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