The fund manager has received a $50 million capital injection and will split from its associated listed investment fund as it seeks to rebuild market confidence after a shocking financial year.
In a series of trading updates late last week, the embattled Brisbane-based fund manager announced the resignation of its CFO and further details of the terms of its new $50 million rescue package provided by New York-based hedge fund Oaktree Capital.
Blue Sky chairman John Kain, in a letter to shareholders, described the 2018 financial year as an ‘annus horribilis’ for the group.
“Our financial result has been dreadful, our reputation has been materially diminished and market sentiment has collapsed,” he said
“Notwithstanding this, we have maintained the confidence and support of our institutional investor clients and our team. The importance of this cannot be overstated, as it is our team and our investor clients who, together with a restructured business model, are the key foundations to turning around our financial performance, and over time, our reputation.”
Mr Kain acknowledged that the Glaucus report, released in March, had significant ramifications for Blue Sky. This led to a number of senior personnel changes in the last six months and a strategic review of the entire business. Glaucus Research, a California-based hedge fund and short-seller, alleged Blue Sky had materially overstated its fee-earning assets under management (FEAUM).
Mr Kaine said the Glaucus report and its associated short selling campaign “destroyed market confidence in Blue Sky.”
In FY18 Blue Sky revenues fell 63 per cent to $24.9 million, while NPAT plummeted 436 per cent. Blue Sky’s profits, cash flow and EBITDA are all firmly into the red by tens of millions of dollars.
In its annual report, the company explained that FY18 NPAT was negatively impacted by significant abnormal restructure costs; unbudgeted increases in corporate and legal advice; non-cash impacts resulting from the independent review of carrying values for every investment fund; and the termination or deferment of certain retirement living and Australian PBSA development projects.
“Management fees of $23.1 million (FY17: $22.8 million) were generated but reduced to $13.6 million (FY17: $21.9 million) or a 38 per cent decrease year-on-year,” the report said.
“These reversals were largely due to decisions made in June to terminate certain property development projects. Similarly, transaction fees earned on new investment funds were 74 per cent less at $4.1 million (FY17: $15.7 million) after reversals of $8.6 million which also largely represent fees returned for the property development projects noted above.”
Blue Sky has long maintained that the four keys to its business are investor returns; growth in fee earning assets under management (‘FEAUM’); governance, risk and compliance; and its team.
“An important lesson from the last six months is that whilst three of these matters are absolutely key to our business, the growth in FEAUM is not of itself a key to our business,” Mr Kain said.
“Rather, growth in FEAUM is simply a consequence of a great team consistently delivering strong risk-adjusted returns to our investor clients. And if we deliver those returns to our investor clients, our team, our business and our shareholders will all prosper.”
Blue Sky believes its deliberate move away from a focus on growing FEAUM will be seen in the changes to its business, including in the changes to our remuneration model.
Investment teams will (in addition to fixed remuneration) be directly remunerated by sharing 50 per cent of the profit of the Blue Sky’s business unit.
“That is a move from sharing ~25 per cent of gross profit (under our current Investment Company Bonus Policy) to ~50 per cent of net profit. That share of profit shall be paid in cash (25–50 per cent) and through reinvestment alongside our investor clients into the strategies managed by the investment teams (50–75 per cent),” the group confirmed.
“These changes will further drive the behaviours necessary to deliver top quartile investment returns to investor clients, and by doing that, to advance the interests of Blue Sky, its team and its shareholders.”