Blue Sky Alternative Investments Ltd. (ASX: BLA) – Glaucus Research

Blue Sky Alternative Investments Limited (ASX: BLA) (“Blue Sky” or the “Company”) is an Australian fund manager with a purported $3.9 billion of fee earning assets under management (“AUM”) as of December 2017. Blue Sky also claims to have achieved a 15% Internal Rate of Return (“IRR“) net of fees since inception. Driven by the supposed rapid increase in ‘fee earning’ AUM and fantastic reported performance, Blue Sky’s market capitalization has grown exponentially to nearly $1 billion.

But all is not as it seems. We believe that Blue Sky is significantly overstating its fee earning AUM by reporting the gross value of certain assets as AUM instead of the fair value of the capital invested. Based on our analysis, we estimate that Blue Sky’s real fee earning AUM is at most $1.5 billion, 63% less than Blue Sky’s reported figure.

We believe Blue Sky compensates for its overstated AUM by charging clients egregious management fees, which can reach up to 17% of the capital invested in Blue Sky funds and are charged irrespective of the performance of the underlying investment. Because investors will soon wise up, we view Blue Sky’s fee revenues as inherently unsustainable. In other cases, such as private equity, we present evidence that Blue Sky has overstated its returns on many investments (a practice we believe is systematic). Through the overstatement of AUM and returns, Blue Sky inflates its current revenue and profits, driving up its stock price and attracting further capital.

Blue Sky’s main broker, Morgans, claims that AUM is the key driver of revenues and ultimately the share price of the Company. Blue Sky likes to compare itself to US-listed alternative asset managers; Apollo, KKR and Blackstone have an enterprise value which is on average 13% of their fee earning AUM. If we apply the same ratio to Blue Sky, and factor in a corporate governance discount, we estimate that the Company’s shares are worth at most $2.66 per share.