blue sky limited - microequities asset management managed...
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MICROCAP COMPANY RESEARCH
I N I T I A T I N G C O V E R A G E
Blue Sky Limited
The Sky’s the Limit
EEvveenntt
Alternative asset manager: Blue Sky aims to be the
predominant alternative asset manager in Australia. The
company manages funds that invest in four distinct asset
classes and has a mix of institutional and retail investors.
Strong investment performance driving AUM growth: The
alternative asset management business model tends to result
in sticker AUM as the funds are often long term close-ended
in nature. Strong investment performance over the past
seven years and a track record of outperformance is starting
to help Blue Sky win larger institutional mandates.
Co-investment in its own funds: Blue Sky co-invests in
most of the funds it sets up. After the recent capital raising,
the company currently holds around $0.86 per share in
investments and net cash on its balance sheet.
OOuurr vviieeww
FY14 forecasts: We forecast FY14 underlying NPAT of
$5.1m on circa $577m of AUM. This is up from $3.8m in
FY13. Revenue is forecast to be $19.1m, up 35% from FY13.
Growth from three sources: Blue Sky will derive revenue
and profit growth from increasing AUM leading to increased
management fee income. Performance fees will be derived
from strong investment returns above the benchmark.
Shareholders will also enjoy returns on the co-investments
held on the balance sheet.
VVaalluuaattiioonn || RReeccoommmmeennddaattiioonn
We initiate coverage with a HOLD recommendation with a price
objective of $2.45 per share, which implies a premium of 2%
over the last traded price of $2.40. Blue Sky provides exposure
to the growing alternative asset management sector as there is
an increasing allocation by super funds and individual investors
towards alternative assets. We see significant growth in intrinsic
value in Blue Sky as its AUM growth trajectory continues towards
their stated $2bn target.
COMP ANY DESCRIPTION
Blue Sky Alternative Investments [ASX:BLA] is an alternative
asset manager with more than $550m in assets under
management (AUM). The company manages funds in private
equity/venture capital, real estate development, water
infrastructure and water entitlements and global macro hedge
funds.
88tthh MMaayy 22001144
BLA HOLD
PPrriiccee OObbjjeeccttiivvee:: $2.45
LLaasstt ttrraaddeedd AA$$ $$22..4400
MMaarrkkeett CCaapp AA$$’’mm 113366..99
NNºº ooff SShhaarreess mm 5577..00
22001133AA EEPPSS ¢¢ 1111..00
22001144FF EEPPSS ¢¢ 99..00
22001144FF PPEE xx 2266..66
22001144FF EEVV//EEBBIITTDDAA xx 1144..55
22001144FF DDPPSS ¢¢ 77..00
DDiivv YYiieelldd %% 22..99%%
SSaalleess 22001133AA mm 1144..00
SSaalleess 22001144FF mm 1188..99
EEBBIITTDDAA 22001133AA mm 55..88
EEBBIITTDDAA 22001144FF mm 88..11
NNPPAATT 22001133AA mm 33..88
NNPPAATT 22001144FF mm 55..11
SShhaarree PPrr iiccee || 1122mmoonntthh
AAnnaallyyssttss
SS hh uu oo YY aa nn gg
ssyyaanngg@@mmiiccrrooeeqquuiittiieess..ccoomm..aauu
TTeell:: ((661122)) 99223322 77449944
GICS: Diversified Financials – Funds Management
IMPORTANT DISCLOSURE INFORMATION AT THE END OF THIS REPORT
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CONTENTS
COMPANY PROFILE .......................................................................................................... 3
BUSINESS DESCRIPTION ................................................................................................. 4
INVESTMENT THEMATICS ............................................................................................... 4
REVENUE MODEL ........................................................................................................... 10
COST STRUCTURE ......................................................................................................... 12
DISTRIBUTION STRATEGY ............................................................................................. 12
INDUSTRY ANALYSIS ..................................................................................................... 14
COMPETITOR ANALYSIS ................................................................................................ 17
SWOT ANALYSIS ............................................................................................................. 18
HISTORICAL FINANCIALS ............................................................................................... 19
FY14 & FY15 FORECASTS .............................................................................................. 20
INVESTMENT CASE ........................................................................................................ 23
RISK ANALYSIS ............................................................................................................... 24
VALUATION | RECOMMENDATION ................................................................................ 25
PRICE OBJECTIVE & RECOMMENDATION HISTORY .................................................. 26
MAJOR SHAREHOLDERS ............................................................................................... 26
FINANCIAL SUMMARY .................................................................................................... 27
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COMPANY PROFILE
Background
Blue Sky Limited [ASX: BLA] was founded in 2006 and is an alternative asset manager with more than $550m of assets
under management (AUM) across four distinct asset classes; private equity/venture capital, private real estate, real
assets/water infrastructure and hedge funds. Blue Sky has grown its assets under management since listing through
new fund offerings, an established track record of investment outperformance and awarding of institutional mandates.
Management is targeting an acceleration in AUM growth to $1bn by FY15 and $2bn by FY17.
CORPORATE DIRECTORS & EXECUTIVES
John Kain | Chairman, Non-Executive Director
John is a corporate lawyer with expertise in corporate advisory, private equity and M&A. He practiced as a partner at two commercial law firms
before establishing Kain Corporate + Commercial Lawyers in mid-2004. Kain C+C Lawyers is a specialist legal consulting company, with more
than 25 team members advising customers across Australia in corporate, commercial and M&A law. John is currently Chairman of an Adelaide
based investment company and has served on a number of boards including as a director of public charitable trusts, Chairman of a
Commonwealth government advisory panel and as director of a number of private companies. John is a Fellow of the Australian Institute of
Company Directors. John graduates from Adelaide University and was admitted to legal practice in South Australia in 1990. He was
subsequently admitted to practice in England and Wales and in NSW.
Mark Sowerby | Managing Director
Mark is the founder and MD of Blue Sky Limited. Mark manages the strategic direction of the Group including sourcing investment opportunities
and management of the investment portfolio. Before founding the Blue Sky group, Mark worked for 12 year in commodities trading, living and
working in the US, Mexico, Central America, Europe and Asia. He developed a strong understanding of global trade and economics, logistics,
operations, finance and derivatives. The experience Mark gained during his time has been instrumental in the establishment of values and
principles on which the Group is based. Mark holds a Bachelor of Agricultural Science from the University of Queensland, a Graduate Diploma of
Applied Finance from the Financial Services Institute of Australia, and a Masters of Business Administration from the University of Queensland.
Mark has also completed the Private Equity and Venture Capital course at Harvard Business School, Boston, USA.
Tim Wilson | Executive Director
Tim is the MD of the Group’s private equity team. He is responsible for leading this team, sourcing and negotiating deals, advising portfolio
companies on financing, entry and exit negotiation and building the Group’s network. Tim has been involved in private equity for the last sixteen
years with Blue Sky Private Equity, and previously through investment banking roles in London, Sydney and Brisbane. He began his career as a
commercial lawyer in Brisbane with Minter Ellison before moving to London where he lived for six years, working in investment banking roles
with Paribas and Credit Suisse First Boston. Tim then returned to Australia and worked in finance roles with Babcock & Brown, Westpac
Institutional Bank and Investec before joining Blue Sky in 2009 to run the private equity group. Tim holds a Bachelor of Commerce and a
Bachelor of Laws from the University of Queensland, a Graduate Diploma of Applied Finance and Investment and a Master of Science in
Finance from the London Business School. Tim has also undertaken the Private Equity and Venture Capital course at Harvard Business School,
Boston, USA.
Alex McNab | Executive Director
Alex previously worked for eight years with Bain & Company, a leading global strategy consultancy. Alex worked in Sydney, Melbourne,
Singapore and San Francisco and developed a broad skill set including the formulation of corporate and business unit strategies, leading
performance improvement projects and influencing management teams to drive results. His experience stretches across a broad range of
sectors including financial services, telecommunications, retail, consumer products and technology. Alex holds a Bachelor of Economics
(University Medal) and a Bachelor of Laws from the University of Queensland. Alex is also a graduate of the Royal Military College of Australia
and is an INSEAD graduate with a Masters of Business Administration (Honours).
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BUSINESS DESCRIPTION
Blue Sky Limited is an alternative asset manager, managing funds investing in private equity/venture
capital, private real estate, real assets/water infrastructure and hedges funds. Unlike a traditional
equities fund manager, Blue Sky solely focuses on alternative asset classes and aspires to be the
household name in alternative assets in Australia.
Blue Sky follows closely the business model of global alternative fund managers such as Carlyle Group
and Blackstone. Management have diversified the business away from a pure private equity manager
into three other asset classes. Private equity funds tend to have a cyclical business model that cause
capital inflows and outflows at the wrong point in the economic cycle and require significant working
capital between fund inception and exit.
INVESTMENT THEMATICS
Blue Sky’s investment team seek to identify long term thematics that provide the broad roadmap for
each investment idea. To date, the team has focused on the necessities to a population, that being,
energy, food, housing, water, health and infrastructure.
Private Equity/Venture Capital
Blue Sky Private Equity (BSPE) provides expansion capital to established and growing businesses.
Expansion capital refers to funds used by the investee companies for growth, as opposed to
leveraged/management buyouts (LBO/MBO) whereby significant leverage is used to purchase an
existing stable, high cash flow generative business. It also differs from venture capital which typically
invests in start-up companies that currently generates little revenue or earnings. The return on
investment for Blue Sky is primarily derived from growing the profits of the investee company with further
upside from a higher multiple on exit.
BSPE typically invest in small to medium businesses with enterprise value of $10m-$30m. There is less
competition in this segment as the deals are too small for larger private equity funds and bank funding is
still not a channel that is available for most SMEs since the GFC. In a typical deal, BSPE looks to take a
significant but a non-controlling equity stake (typically 30-50%) and board representation. BSPE is not
just a financial investor, rather it also assists investee companies in developing and refining their
strategic priorities, growth roadmap, operations and corporate governance.
Criterion for selecting potential investee companies include:
High growth businesses that require private capital to fund expansion
Established track record of profitability
Entrepreneurial management team that are committed to the business
Innovative concepts or ideas that will revolutionise or capitalise on changes within an industry
Have a clear plan for exit within 3-5 years
Blue Sky Limited is a
diversified alternative
asset manager.
Blue Sky’s private
equity funds seek to
invest in growing
profitable companies
that require new
capital for growth
opportunities.
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Advantages of investing in the ‘expansion capital’ segment of private equity include:
Less competition than leveraged buyouts allowing for entry at attractive valuations
High growth businesses
Companies are seeking capital for growth which provides an alignment of interest between
owners and BSPE
Ability to add value through active operational management
More recently, Blue Sky established a venture capital fund, VC2012 to invest in earlier stage companies.
Figure 1: Examples of investments in BLA private equity and venture capital funds
Portfolio Company
Notes Date of Investment
Paws for Life
OOnnlliinnee ssuubbssccrriippttiioonn mmooddeell
rreettaaiilleerr ooff ppeett ffooooddss,, mmeeddiicciinnee
aanndd aacccceessssoorriieess..
NNoovveemmbbeerr 22001133
Coventus
Orthopaedics
MMeeddiiccaall ddeevviicceess ccoommppaannyy wwiitthh
pprroodduuccttss ddeevveellooppeedd ffoorr ffrraaccttuurree
rreeppaaiirrss..
SSeepptteemmbbeerr 22001133
Hatchtech
DDeevveellooppmmeenntt ooff hheeaadd lliiccee
ttrreeaattmmeenntt pprroodduuccttss.. OOccttoobbeerr 22001133
Readify
DDeevveellooppeerr ooff aapppplliiccaattiioonnss ffoorr
bbuussiinneessss ccuussttoommeerrss.. FFYY1133
rreevveennuuee ooff $$2277mm,, 2244%% CCAAGGRR
ssiinnccee FFYY0088..
JJuunnee 22001133
Oaktree
DDeevveellooppeerr aanndd ooppeerraattoorr ooff
rreettiirreemmeenntt vviillllaaggeess aaccrroossss QQLLDD,,
NNSSWW,, VViiccttoorriiaa aanndd TTaassmmaanniiaa..
JJuullyy 22001133
Lenard’s
FFrraanncchhiissoorr ooff rreettaaiill cchhiicckkeenn
ssttoorreess NNoovveemmbbeerr 22001100
Viking Rentals
PPoorrttaabbllee ttooiilleett hhiirree bbuussiinneessss ffoorr
bbuuiillddiinngg iinndduussttrryy aanndd eevveenntt hhiirree.. NNoovveemmbbeerr 22001100
Alcidion
SSooffttwwaarree ccoommppaannyy ddeevveellooppiinngg aa
rraannggee ooff cclliinniiccaall rriisskk
mmaannaaggeemmeenntt aanndd ddeecciissiioonn
ssuuppppoorrtt ssooffttwwaarree ppllaattffoorrmmss ffoorr
ccuussttoommeerrss iinn tthhee hheeaalltthhccaarree
sseeccttoorr..
JJaannuuaarryy 22001122
Q Energy
BBrriissbbaannee bbaasseedd eelleeccttrriicciittyy
rreettaaiilleerr eessttaabblliisshheedd iinn 22000066
ffooccuusseedd oonn SSMMEEss..
22001122
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Source: Company data
Private Real Estate
Real estate development
Blue Sky Private Real Estate (BSPRE) division invests in real estate development projects, typically
medium and high-density projects in Brisbane and nearby regional centres. The funds managed by
BSPRE has a mandate to invest across a broad range of real estate from residential to commercial and
industrial, at all levels of the capital structure (e.g. mezzanine financing, direct equity financing).
Since inception the focus has centred around affordable residential developments such as low-rise
apartments and townhouses with average selling prices sub $400,000 in areas with employment growth,
increasing incomes, investment infrastructure and population growth. Blue Sky manages the entire
development process from site acquisition to financing, development and sales. To date BSPRE has
focused on smaller projects with gross realisation values of between $10m and $50m.
Figure 2: Examples of past and current development projects
OICS
PPrroovviiddeerr ooff ccaatteerriinngg aanndd ootthheerr
sseerrvviicceess ttoo tthhee ooiill iinndduussttrryy,,
mmiinniinngg aanndd ppiippeelliinnee ccoonnssttrruuccttiioonn
pprroojjeeccttss iinn rreemmoottee aarreeaass..
AAuugguusstt 22001122
Beach Burrito
MMeexxiiccaann ffoooodd ffaasstt ccaassuuaall ddiinniinngg
rreessttaauurraanntt.. NNoovveemmbbeerr 22001122
Enthalpy
MMiinniinngg pprroojjeecctt ccoonnssuullttaannttss.. JJuunnee 22001100
Milk & Co
MMeenn’’ss aanndd iinnffaanntt sskkiinnccaarree
ccoommppaannyy eessttaabblliisshheedd bbyy
AAuussttrraalliiaann OOllyymmppiicc sswwiimmmmeerr
MMiicchhaaeell KKlliimm aanndd wwiiffee LLiinnddyy..
JJuunnee 22001122
Balance
Carbon
CCaarrbboonn eenneerrggyy aanndd
ssuussttaannaabbiilliittyy mmaannaaggeemmeenntt aanndd
ccoonnssuullttiinngg ccoommppaannyy..
MMaarrcchh 22001100
Project Name
Forecast/Actual Gross
realisation ($) Notes Project Timeframe Location
The
Governor
$16.9m
3366 aappaarrttmmeennttss
11 aanndd 22 bbeeddrroooommss DDeecc 1133 –– SSeepptt 1155 BBoowweenn HHiillllss,, BBrriissbbaannee
Regents
Lane $25.9m
5577 aappaarrttmmeennttss
11 aanndd 22 bbeeddrroooommss AAuugg 1133 –– MMaarr 1155
WWoooolllloooonnggaabbbbaa,,
BBrriissbbaannee
Railway
Terrace $32.5m
7700 aappaarrttmmeennttss
11 aanndd 22 bbeeddrroooommss DDeecc 1133 –– FFeebb 1166 MMiillttoonn,, BBrriissbbaannee
Blue Sky private real
estate has to date
developed low cost
higher density
residential properties.
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Source: Company data
Residential asset management (BSRAM)
Blue Sky also manages funds, which acquire freehold property or management rights to residential
apartment complexes and shorter-term accommodation properties, including projects previously
developed by Blue Sky Private Real Estate.
BSRAM typically seeks to acquire freehold property or management rights over property with high
occupancy levels, in areas of employment and rental growth. Funds investing in management rights over
a single or two apartment complexes are a relatively new concept for investors. Management rights are
simply caretaking arrangements and letting services with the body corporate of a complex. Caretakers
are appointed by the body corporate to maintain all common areas of an apartment complex in return for
a salary. The caretaker can arrange for outside tradespeople to conduct repairs and the costs are borne
The Pavillion $15.7m 3366 aappaarrttmmeennttss
11 aanndd 22 bbeeddrroooommss DDeecc 1133 –– SSeepptt 1155 BBoowweenn HHiillllss,, BBrriissbbaannee
Lake Haven $17.7m 4466 ttoowwnnhhoouusseess
22 aanndd 33 bbeeddrroooommss JJuunn 1133 –– JJuull 1144 BBrriigghhttwwaatteerr,, KKaawwaannaa
Castle Point $35.5m
9988 aappaarrttmmeennttss
11,, 22 aanndd 33
bbeeddrroooommss
SSttaaggee 11:: MMaayy 1133 –– JJaann
1144
BBeellggiiaann GGaarrddeennss,,
TToowwnnssvviillllee
Riverside
Gardens $35m
111100 aappaarrttmmeennttss
11,, 22 aanndd 33
bbeeddrroooommss
JJuull 1133 –– FFeebb 1144 DDoouuggllaass,, TToowwnnssvviillllee
Centrus One $15m
3388 aappaarrttmmeennttss
11,, 22 aanndd 33
bbeeddrroooommss
FFeebb 1133 EEiigghhtt MMiillee PPllaaiinnss,,
BBrriissbbaannee
Riverway
Point $25.4
7700 aappaarrttmmeennttss
22 aanndd 33 bbeeddrroooommss DDeecc 1111 CCoonnddoonn,, TToowwnnssvviillllee
Plantations
at Beenleigh $12.5m
4411 aappaarrttmmeennttss
11,, 22 aanndd 33
bbeeddrroooommss
AAuugg 1111 BBeeeennlleeiigghh,, LLooggaann CCiittyy
Kelso
Townhouses $4m 1122 ttoowwnnhhoouusseess OOcctt 0099 KKeellssoo,, TToowwnnssvviillllee
Skyring
Terraces $8.8m 2288 ttoowwnnhhoouusseess JJuunn 0099 BBuunnddaabbeerrgg
Paddington
Terraces $4m 88 ttoowwnnhhoouusseess MMaarr 0088 DDoouuggllaass,, TToowwnnssvviillllee
Blue Sky residential
asset management
invests in freehold
properties and
management rights to
apartment complexes.
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by the body corporate. The body corporate also grants the caretaker exclusive rights to conduct a letting
business for the complex whereby apartment owners within the ‘letting pool’ of the complex who want to
lease out their apartments must go through the caretaker. In return the caretaker is paid a percentage of
the rent, similar to a real estate agency property management fee. These management rights typically
come with a freehold apartment for the caretaker and the right to use the office or front-of-house within
the complex and/or common property.
Figure 3: Selected examples of fund offerings in BSRAM
Source: Company data
Real Assets/Water Infrastructure
The third pillar to Blue Sky’s suite of alternative assets are its funds investing in water entitlements and
water infrastructure. Blue Sky manages both the Blue Sky Water Fund and the Water Utilities Australia
Fund.
Blue Sky Water Fund (BSWF)
BSWF invests in water entitlements, which gives the holder a perpetual right to access a share of water
from a defined source each year. The rights are issued and regulated by state governments. The
volume of water can be sold to agricultural, urban and commercial users, generating income. The rights
can also be on-sold for a capital gain. Blue Sky estimates the Australian water entitlement market is
worth $25bn to $30bn with annual entitlements traded worth between $1.5bn and $2bn. The long-term
growth dynamics for water entitlements are strong due to increasing scarcity of water and demand for
water from increasing farm production to support population growth domestically and food consumption
in the Asian region. Another key differentiating factor for investors is the low correlation of returns with
traditional financial assets and a new way to access the growth in the agriculture sector.
Water Utilities Australia
Water Utilities Group is a vertically integrated operator of water infrastructure assets across the water
supply chain. Services include supply of recycled water for household use, irrigation and industrial use
and the provision of sewerage and wastewater treatment services.
Fund Location Asset Target Return Term
Residential
Asset Income
Fund 1
Mackay
CCoorraall CCaayy RReessoorrtt
MMoottoorr IInnnn
1100%% ccaasshh yyiieelldd ppaa ++
33%%--66%% ccaappiittaall ggrroowwtthh
ppaa
33--55 yyeeaarrss
Management
Rights
Income Fund
3
Darwin +
Brisbane
MMaannaaggeemmeenntt
rriigghhttss oovveerr:: GGaabbbbaa
CCeennttrraall ((115599
aappaarrttmmeennttss)) ++
CCuulllleenn BBaayy
RReessoorrttss ((112288
aappaarrttmmeennttss)) ++
ffrreeeehhoolldd
mmaannaaggeerr’’ss
aappaarrttmmeennttss
1100%% ccaasshh yyiieelldd ppaa ++
55%%--1100%% ccaappiittaall
ggrroowwtthh ppaa
22--33 yyeeaarrss
The real assets
division invests in
water infrastructure
and water
entitlements.
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Hedge Funds
Blue Sky recently acquired Adelaide based hedge fund and fund of funds manager Investment Science
Pty Ltd (ISPL) for circa $1m in Blue Sky scrip (to be issued at $2.07 per share) plus further earn-outs in
FY14 to FY18 dependent on AUM growth. The manager currently has AUM of circa $60m. The
manager’s funds follow a quantitative strategic risk allocation (SRA) style focusing first on a targeted
portfolio volatility level and then maximising returns.
ISPL manages three funds, being the SRA4, SRA9 and SRA16 funds. The SRA4 fund is a fund-of-
funds, targeting a low portfolio volatility of 4%, consistent with a conservative portfolio. The fund
allocates capital to a broad range of external fund managers with differing investment styles and seeks
to hedge market and currency risk itself. For example, SRA4 fund at the end of March 2014 allocated
around 28% to long only equity funds, 13% to a global tactical/macro style fund, 39% to long/short equity
funds, 8% to a commodities futures fund and 14% in cash holding. The fund has delivered 3.1% per
annum return since inception in November 2007.
The SRA9 fund targets a volatility of 9%, consistent with a growth style portfolio. It also employs a fund-
of-funds strategy with allocations spread between different investment styles such as domestic,
international equities, long/short, etc. The fund has delivered a return of 6.4% per annum since inception
in November 2007.
The SRA16 fund targets a 16% per annum volatility consistent with a 100% equities portfolio. The fund
directly invests in international futures contracts using a range of quantitative and qualitative strategies,
although it has the mandate to invest through other asset managers. To date, SRA16 has delivered
8.6% per annum return since inception in November 2007.
Our understanding is that Blue Sky has closed the Blue Sky Apeiron Global Macro Fund. At the end of
February 2014, assets under management were $5.3m. This has declined significantly following a
prolonged period of poor investment returns. Over a rolling five-year period, the total returns for the fund
has been negative 3.58% per annum compound and negative 22.68% over the past 12 months.
Figure 4: Organisation structure within Blue Sky’s hedge fund division
Source: Company data
Hedge Funds
Investment Science P/L
SRA 4
SRA 6
SRA 16
Hedge fund division
consists of the
recently acquired ISPL
funds.
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Blue Sky Alternatives Access Fund (Listed Investment Company)
Blue Sky has announced the establishment and initial public offering of Blue Sky Alternatives Access
Fund, a listed investment company (LIC). The offer is expected to raise between $50m and $100m with
a one-for-one option issued at a strike price of $1. The fund is targeted at the financial planning channel
whom may previously have had issues with the illiquid nature of Blue Sky’s funds. Capital raised will be
invested across Blue Sky’s existing open-ended unlisted funds and currently open or future private
equity, venture capital, real estate development or real estate asset management funds.
REVENUE MODEL
The main drivers of revenue and profit for Blue Sky is the ability to source investment opportunities,
develop new fund offerings and attract capital from investors to invest in these funds. This combined
with strong investment returns generates management and performance fee income and increase in
value of investments held by Blue Sky in its own funds.
Blue Sky’s revenue is derived from management, transaction and performance fees on funds it
manages. Blue Sky also holds units in a number of the funds it manages and the distributions it receives
and realisation of those units are another source of revenue.
Management Fee
Management fee income varies on the different funds, typically between 1.5% and 2% per annum based
on assets under management. This revenue stream is recurring with growth in management fee income
driven by net increase in AUM, establishment of new investment funds and investment returns of the
underlying fund assets.
Figure 5: Management fee summary of all funds
Source: Company data
Divisions Management fee p.a.
Private Equity/Venture Capital Funds
2%
Real Estate Funds 1.5-2%
Water Funds Circa 2% for Blue Sky Water Entitlements Fund
Hedge Funds 1.2% for ISPL SRA4 and SRA9 Funds
2.0% for ISPL SRA16 Fund
Blue Sky Alternatives Access Fund (LIC) 1.2%
Revenue is derived
from management,
transaction and
performance fees and
distributions on units
in its own funds.
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Performance Fee
Blue Sky earns performance fees on most of its funds, resulting in an alignment of interest between the
manager and investors in the funds. Performance fee income typically varies between 15% and 20% of
any outperformance over an absolute hurdle or benchmark. Open-ended funds are subject to high water
marks whereby performance fees are only charged when the unit price reaches a new high. Close-
ended funds such as the private equity/venture capital and real estate funds earn performance fees on
exit of the underlying companies or assets of the funds. This lag in earnings and accruing the
performance fee means that there are large amounts of unrecognised performance fees built up in some
of the funds. We believe there are significant fees built up in the private equity and venture capital funds,
which will be recognised as revenue and received as investee companies in that fund, are exited.
Figure 6: Performance fee summary of all funds
Source: Company data
Transaction Fee
Transaction fee income is generally earned on the real estate funds and private equity/venture capital
funds. These are one-off costs charged at the inception of the fund and include fees for asset
acquisition, equity raising, due diligence, legal and compliance costs. Transaction fees largely cover the
actual expenses in setting up each fund.
Investment Income
Blue Sky are also co-investors in funds it manages through seeding the funds, receiving units in the fund
on inception in lieu of cash as a success fee or receiving additional units in the funds in lieu of
management and performance fees. Distributions are received on units held in its funds and revaluation
of units flow through the income statement.
Divisions Management fee p.a.
Private Equity/Venture Capital Funds 15% above 8% IRR hurdle payable at time of exit
Real Estate Funds 20% over 8% IRR hurdle payable at time of exit
Water Funds 18% above 8%p.a. hurdle subject to high water
mark (HWM)
Hedge Funds
No performance fees for SRA4 and SRA9 Funds
20% above RBA cash rate subject to HWM for
SRA16 Fund
Blue Sky Alternatives Access Fund (LIC) 17.5% over 8% hurdle subject to HWM
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May 2014 www.microequities.com.au 12
Figure 7: Historical Revenue breakdown by division
Source: Company data
COST STRUCTURE
The majority of Blue Sky’s cost base relate to investment team employment remuneration and admin
expenses. The investment team receives 25% of performance fees earned by the funds. In FY13,
employee expenses accounted for 53% of total expenses with ending headcount at circa 41.
Figure 8: BLA – FY13 Expense breakdown
Source: Company data, Microequities estimates
DISTRIBUTION STRATEGY
Blue Sky distributes its fund offerings to institutional investors, private investors (retail and wholesale)
and through financial planning networks. The institutional market is characterised by long lead times
from initial due diligence to committing capital to the funds which can take upwards of 2-3 years.
Attracting the first institutional investor usually takes the longest time with subsequent institutional
mandates having much shorter lead times as due diligence is perceived to have been performed
already. Institutional mandates usually have negotiated fee structures and are struck at lower
percentage management fees. Blue Sky notes that it is attracting more attention from both domestic and
international institutional investors such as large superannuation funds due to its established investment
track record and variety of alternative asset offerings. The group established a New York office in 2012
to attract international institutional investors.
A second distribution strategy is through financial planning networks. Blue Sky has to date found this a
challenging channel as platforms demand daily unit pricing and liquidity. The assets that Blue Sky fund
Employee 53%
Admin 29%
Other 18%
Figures in A$’million unless stated FY11A FY12A FY13A
MMaannaaggeemmeenntt FFeeee 2.5 5.5 10.8
PPeerrffoorrmmaannccee FFeeee 0.6 2.5 0.9
TTrraannssaaccttiioonnaall FFeeee 0.3 0.6 1.4
IInntteerreesstt aanndd ootthheerr rreevveennuuee 0.1 0.2 0.2
DDiissttrriibbuuttiioonnss//rreevvaalluuaattiioonnss ooff iinnvveessttmmeennttss 0.0 0.1 0.3
TToottaall OOppeerraattiinngg RReevveennuuee 3.5 8.9 13.6
%% cchhaannggee YYooYY -% 154% 52%
The majority of the
cost structure relates
to employee expenses.
Blue Sky distributes
its funds direct to
investors, through
financial planning
networks and
institutional mandates.
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May 2014 www.microequities.com.au 13
invests in, are by their nature, illiquid and thus it is difficult for its funds to be put onto platforms. More
recently, management have announced the establishment of a diversified listed investment company
(LIC) tradeable on the ASX that would allocate funds into each of Blue Sky’s existing unlisted funds. This
would overcome the daily liquidity concerns of financial planners and be a differentiated LIC on the
market.
Blue Sky also distributes direct to the investor, both retail and wholesale. To date this channel has been
the key driver to assets under management (AUM) growth. Blue Sky markets new investment products
to its existing list of investors and acquires new investors through holding investor roadshows, education
sessions, email marketing, word of mouth, sponsorship and references in the media such as in national
newspaper articles.
Figure 9: Fund distribution strategy
Source: Company data
•Long lead time
•Established office in New York to capture interest from overseas institutional investors
Institutional mandates
•Lack of success to date due to fund illiquidity
•Setting up a diversified LIC in 2014 will overcome this barrier
Financial planning network
•Building a brand synonymous with alternative asset investments in Australia
•Market new products to existing client base
Direct to the investor
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INDUSTRY ANALYSIS
Blue Sky operates within the Australian funds management sector with a clear focus on alternative asset
classes.
Australian funds management sector
The Australian funds management sector has experienced tremendous growth historically due to rising
equity prices and strong investment inflows. As at December 2013, the Australian Bureau of Statistics
(ABS) reported total funds under management was circa $2.29 trillion. This is up from $874 billion in
December 2003, a rise of 10.1% compound per annum over that period. Since the start of ABS records
in 1988, funds under management have grown at a compound rate of 10.9% (from Dec 1988 to Dec
2013).
Figure 10: Australian funds management sector funds under management
Source: Australian Bureau of Statistics (ABS)
The growth in funds under management continues to enjoy a number of major tailwinds. First,
compulsory employer contribution to employee’s superannuation funds at 9.25% of ordinary earnings,
rising to 12% by July 2019 will drive strong investment inflows into the sector. Favourable tax treatment
of superannuation as a savings vehicle will underpin inflows into the superannuation environment.
Furthermore, rising asset prices over the long term will continue to drive total funds under management
growth and sustain inflow into the funds management sector.
Alternative asset management sector
The alternative asset management sector include private equity, real estate, commodities, infrastructure
and hedge funds. According to a 2010 Austrade report into the industry1, the alternative asset
management sector in Australia managed around $210 billion split between $46.8bn in hedge funds,
$78.2bn in real estate investment trusts, $24.5bn in private equity and venture capital and $60bn in
infrastructure funds. A recent Rainmaker industry report2 in April 2014 reports alternative FUM has
grown to $285bn at the end of calendar year 2013.
1 ‘Alternative Investments in Australia’ Austrade 2010
2 Rainmaker Information ‘Rainmarket Roundup (Edition 65)’ September 2013 edition
0
500
1000
1500
2000
2500
Jun
-19
88
Jul-
19
89
Au
g-1
99
0
Sep
-19
91
Oct
-19
92
No
v-1
99
3
Dec
-19
94
Jan
-19
96
Feb
-19
97
Mar
-19
98
Ap
r-1
99
9
May
-20
00
Jun
-20
01
Jul-
20
02
Au
g-2
00
3
Sep
-20
04
Oct
-20
05
No
v-2
00
6
Dec
-20
07
Jan
-20
09
Feb
-20
10
Mar
-20
11
Ap
r-2
01
2
May
-20
13
Australian funds
management industry
has seen FUM growth
of 10.9% p.a. from
1988 to 2013.
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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May 2014 www.microequities.com.au 15
Figure 11: Australian alternative asset management sector funds under management in 2010
Source: Austrade publication: Alternative Investments in Australia (2010)
Growth in each of the alternative asset management categories will come from:
Infrastructure funds growth will be driven by continued growth in funds invested in the
superannuation environment as superannuation fund trustees continue to seek to invest in
assets that have stable cash flows and can meet long dated liabilities. The increasing
divestment of previously government owned assets to fund new infrastructure spending will
increase the amount of assets available for funds to invest in.
Private equity and venture capital sector especially in the mid-market and start-up segments
will see increased fundraising as lending from banks is still tight after the GFC.
Real estate trusts and development funds are enjoying the current low interest rate
environment, favourable government policies and international investment in newly developed
residential properties.
Global hedge funds are typically the domain of high new worth (HNW) investors. Hedge funds
aim to provide uncorrelated returns with mainstream asset returns and allow access to asset
classes and investment strategies that are not commonly accessible to retail investors.
Figure 12: Forecast growth in allocation towards alternative asset classes in Australian funds management industry
Source: Originally published by Rainmaker Information, ‘Rainmaker Roundup’ (September 2013 edition), Blue Sky Alternative Access Fund Limited Prospectus (May 2014)
Private Equity/VC
12%
Hedge Fund 22%
Real Estate Trusts 37%
Infrastructure Funds 29%
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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May 2014 www.microequities.com.au 16
Allocation of total funds in the asset management industry to alternative asset classes in Australia is
relatively low. There has been an increasing drive by superannuation funds to increase their allocation
towards alternative asset classes as there is a greater understanding of the role that alternative assets
play in an overall portfolio context. The impact of the global financial crisis has also put into question
whether the bull market in the period prior to 2007 resulted in complacency amongst fund trustees and
over-allocation to traditional equities. A recent Rainmaker industry report published in December 2013
showed that allocation in Australia towards alternatives was circa 5% in 1997 growing to 14% by 2013.
This is forecast to rise to 18% by 2033, which combined with sustained growth in the overall funds
management sector (FUM growth forecast of circa 8% pa compound by Rainmarker for the next 20
years) will see above FUM growth in alternatives from circa $285bn currently to close to $2 trillion .
Blue Sky expects the growth of alternative assets will grow over time due to:
Higher average allocation to alternative assets globally compared to Australia. A Russell
Investments survey of institutional investors in 2012 found allocation to alternatives was on
average around 22.4% of their total portfolio.
Portfolio diversification that alternative assets bring to investors due to its low correlation of
returns compared with traditional asset classes.
Superior risk adjusted returns
Alignment of fund manager incentives with those of the investor as most of the fees earned by
Blue Sky are performance fees based on outperformance against an absolute hurdle instead of
an index. Blue Sky also seeds and invests in most of the funds that it setups up, providing
another alignment of interest.
Increasing demand from retail investors who have not previously had access to alternative
assets. The funds managed by Blue Sky are targeted at SMSFs, retail investors and wholesale
investors. There is increasing demand for investment products outside of those recommended
by financial planners especially for self-managed super funds as they become more educated
about the benefits of alternative assets within a portfolio context.
Blue Sky expects
increasing investor
allocation towards
alternative asset
classes over time.
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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May 2014 www.microequities.com.au 17
COMPETITOR ANALYSIS
Competitors to Blue Sky can be categorised into the various asset classes that Blue Sky Funds invest in,
being private equity and venture capital, water entitlements, residential real estate development and
global hedge fund.
Figure 13: Competitors in various alternative asset classes
Source: Company data, Microequities estimates
Blue Sky alternative asset classes
Competitors Notes
Private Equity/Venture
Capital
NBC Capital
Anacacia Capital
Wolseley PE
Anchorage
NNBBCC CCaappiittaall iiss aallssoo aa BBrriissbbaannee bbaasseedd mmiidd--
mmaarrkkeett pprriivvaattee eeqquuiittyy ffiirrmm.. AAnnaaccaacciiaa aanndd
WWoollsseelleeyy aarree sslliigghhttllyy llaarrggeerr iinn tteerrmmss ooff tthhee
ssiizzee ooff ddeeaallss tthheeyy ttyyppiiccaallllyy iinnvveesstt iinn..
Water
Entitlements/Infrastructure Tandou
CCoommppeettiittoorr ssuucchh aass TTaannddoouu aallssoo ooppeerraattee
ffaarrmmss..
Residential Real Estate
Development
Finbar
Cedar Woods Property
Payce Consolidated
Peet Group
BBlluuee SSkkyy ddeevveellooppss llooww ccoosstt rreessiiddeennttiiaall
hhoouussiinngg iinn QQuueeeennssllaanndd,, uussuuaallllyy $$1155mm ttoo
$$5500mm iinn ggrroossss vvaalluuee ppeerr ssiittee.. CCoommppeettiittoorrss
aarree pprriivvaattee aanndd AASSXX lliisstteedd ooppeerraattiinngg aaccrroossss
nnuummeerroouuss ssttaatteess..
Global Macro Hedge Fund
Morphic Asset
Management
K2 Asset Management
LLaarrggee nnuummbbeerr ooff ccoommppeettiittoorrss aallll wwiitthh
ddiiffffeerreenntt iinnvveessttmmeenntt mmaannddaatteess,, ssttyylleess aanndd
ssttrraatteeggiieess..
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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May 2014 www.microequities.com.au 18
SWOT ANALYSIS
STRENGTHS WEAKNESSES
A strong investment track record across all the four asset
classes since inception. A track record of outperforming
the benchmark is crucial in attracting new investment
inflows and growing AUM.
All funds attract performance fees which can provide a
large boost to revenue in a particular year.
Client base is approximately 50% retail which provides
higher fees, margins and reduces the risk of loss of a
single mandate from an institutional investor.
AUM is sticky once invested due to some of the funds
being close-ended and having a long fixed term. Blue Sky
actively markets new funds to existing investors and
encourages investors to reinvest the proceeds from one
fund into other funds to minimise lost AUM.
Investment in back end systems and staffing in prior years
are now in place to support significant AUM growth.
Therefore, increased management and performance fees
from a larger AUM base will have a more significant
positive impact on the profits.
Lumpy cash flows and earnings as performance fees are
earned once a fund is liquidated. Only the two open-ended
funds, the water entitlement and hedge funds calculate
and earn performance fees on a regular basis throughout
the life of the fund.
Unlike equities fund managers, the business model of an
alternative asset manager does not have the same
operational leverage. This is especially the case in private
equity and real estate development where staff numbers
need to be increased as the business source more deals
and take an active approach in both investee companies
for the private equity funds and real estate development
sites.
Long lead time and relatively high cost in attracting new
capital as investors tend to observe investment
performance for a long time before committing capital.
This is due to the disparate performance of funds in the
alternative asset class and the wide range of investable
assets.
OPPORTUNITIES THREATS
Development of new investment funds such as a potential
expansion capital fund in 2014 and listed investment
company (LIC) that will invest across Blue Sky’s unlisted
funds. This will build on Blue Sky’s track record and the
LIC provides a diversified vehicle targeted at SMSFs and
financial planners.
Blue Sky continues to work on winning mandates for the
water entitlements fund from large overseas and domestic
institutional investors. The due diligence process
undertaken by institutions is an arduous process. After a
recent capital raising, Blue Sky can now display the
balance sheet strength that is necessary in winning
potential mandates.
Acquisition of sub-scale fund managers will accelerate
AUM growth, profitability and expand its product suite.
Blue Sky recently acquired Investment Science Pty Ltd, a
quantitative hedge fund manager with AUM of circa $60m.
Inability to source deals and deploy capital due to high
valuations and increased competition for these assets.
This could result in sub-optimal return on investment or
funds returned to investors. In the near term, our
understanding is that there is a lot more competition for
residential development sites in Brisbane.
Significant downturn in financial markets and negative
perception around risk assets could result in fund
redemptions, lack of new investment inflows and inability
to setup new funds. This could result in Blue Sky missing
its AUM, revenue and profit targets.
A downturn in the Queensland residential property market
could result in Blue Sky funds unable to sell the
apartments that it develops. A downturn in financial
markets could result in Blue Sky private equity finding it
difficult to exit from investee companies through IPOs and
trade sales. These exits are necessary for Blue Sky to
earn performance fees deliver a return to investors in the
funds.
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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May 2014 www.microequities.com.au 19
HISTORICAL FINANCIALS
FY13 Financial Result
Blue Sky delivered operating revenue of $13.2m in FY13, up 48% from FY12 ($8.9m), with AUM
increasing by 75% from $200m to $350m. Net profit after tax was $3.59m largely in line with FY12
underlying net profit of $3.57m.
The substantial rise in revenue is largely driven by the increase in management fees as a result of
increased AUM. Performance fees were minimal as there was a lack of exits from underlying
investments.
Operating expenses were up 31% as the group stepped up marketing and distribution efforts, and the
costs associated with developing opportunities targeted at the institutional market. Increased employee
costs were incurred ahead of future anticipated growth with the back office and investment infrastructure
now in place to handle significant AUM growth.
Figure 14: BLA – Historical annual financial summary
Source: Company data, Microequities estimates
1H14 Financial Result
1H14 saw revenue growth of 31% to $7.2m due to increased management fees from rising AUM.
Management fee revenue was $3.7 in 1H14 compared with $1.95m in 1H13. Performance fee of $0.6m
was also earned in the half compared to $nil in 1H13 as a result of the setup of new funds. Underlying
NPAT was $0.3m compared to $0.6m in 1H13. The lower earnings was the result of investments made
in its investment, distribution and operations teams, as well as the opening of a Sydney office. Readers
should note that revenue and earnings are traditionally weighted to the second half due to more deal
activity. Management have guided for underlying NPAT of at least $5m for the full year.
Figures in A$’million unless stated FY12A FY13A
RReevveennuuee 12.9 14.1
EExxppeennsseess (6.6) (8.6)
++ NNeett IInntteerreesstt EExxppeennssee 0.0 0.0
++ DDeepprr && AAmmoorrttiissaattiioonn 0.1 0.3
EEBBIITTDDAA 6.4 5.8
%% CChhgg YYooYY -% (9%)
EEBBIITTDDAA MMaarrggiinn 49.9% 41%
-- DDeepprr && AAmmoorrttiissaattiioonn (0.1) (0.3)
EEBBIITT 6.3 5.6
EEBBIITT MMaarrggiinn 49.1% 39%
NNeett IInntteerreesstt ((EExxppeennssee)) (0.0) (0.0)
PPrrooffiitt BBeeffoorree TTaaxx 6.3 5.5
TTaaxx BBeenneeffiitt ((EExxppeennssee)) (1.5) (1.7)
UUnnddeerrllyyiinngg NNPPAATT 4.8 3.8
NNPPAATT MMaarrggiinn 38% 27%
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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FY14 & FY15 FORECASTS
Figure 15: BLA – Financial forecast summary
Source: Company data, Microequities estimates
R e v e n u e O u t l o o k
We expect strong assets under management growth (AUM) which underpins our revenue and earnings
growth assumptions. Our assumption is AUM to reach $577m at the end of FY14 with the recently
announced LIC contributing fees in FY15. Our AUM forecast will reach $1.53bn by FY17, more
conservative than management’s target of $2bn in AUM. Our conservatism is due to the long process in
winning large institutional mandates in the alternative asset space. Our AUM growth assumptions are as
follows:
Private Equity and Venture Capital. We have assumed exits and return of capital in FY14, FY15
and FY16, with new fund raising in FY15.
Real Estate. We have assumed net fund inflows in FY15 from the listed investment company
(LIC) allocation and net outflow of $50m in FY18. Real estate development leads to constant
new funds setup and fund closures as developments are completed.
Hedge Funds. We have assumed net fund inflow primarily from the LIC allocation in FY15.
Water funds. We assume $720m of net fund inflow between FY15 and FY17 as institutional
mandates are won.
AUM growth is also impacted by investment return assumptions:
Private Equity and Venture Capital. We have assumed 18% per annum return as an average
for the private equity and venture capital funds.
Real Estate. We have assumed 18% per annum return for the development and management
rights funds.
Hedge Fund. We have assumed 10% per annum return.
Water Funds. We have assumed 9% per annum return.
Our revenue forecasts are broken down between management fees, transaction fees/admin/RE fees
Figures in A$’million unless stated FY13A FY14F FY15F
RReevveennuuee 14.1 19.1 21.7
EExxppeennsseess (8.6) (11.6) (13.0)
++ NNeett IInntteerreesstt EExxppeennssee 0.0 0.3 0.4
++ DDeepprr && AAmmoorrttiissaattiioonn 0.3 0.3 0.3
EEBBIITTDDAA 5.8 8.1 9.4
%% CChhgg YYooYY (7%) 40% 15%
EEBBIITTDDAA MMaarrggiinn 41% 43% 43%
-- DDeepprr && AAmmoorrttiissaattiioonn (0.3) (0.3) (0.3)
EEBBIITT 5.6 7.8 9.1
EEBBIITT MMaarrggiinn 39% 41% 42%
NNeett IInntteerreesstt ((EExxppeennssee)) (0.0) (0.3) (0.4)
PPrrooffiitt BBeeffoorree TTaaxx 5.5 7.5 8.7
TTaaxx BBeenneeffiitt ((EExxppeennssee)) (1.7) (2.4) (2.8)
NNPPAATT 3.8 5.1 5.9
NNPPAATT MMaarrggiinn 27% 27% 27%
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and performance fees. Performance fees are most difficult to forecast as the timing of exits on
investments dictate when fees are earned and accrued. Readers should note that a number of
investments in the private equity and venture capital funds, if exited will result in significant performance
fees for Blue Sky. Overall our revenue to AUM ratio over the long term approximates 2%. Increase in
AUM from lower fee institutional water mandates are the reasons behind our expectation of lower
revenue to AUM ratio over time.
Figure 16: BLA – Revenue to AUM ratio forecast
Source: Company data, Microequities estimates
Blue Sky recently conducted a capital raising to co-invest in its own funds which is a common practice
for alternative asset managers. Shareholders in Blue Sky in future will benefit from the investment
returns on these investments held on balance sheet as well as increased management and performance
fees from the fund management business.
O p e r a t i n g e x p e n s e s
Figure 17: BLA – EBITDA margin historical and forecast
Source: Company data, Microequities estimates
3.3%
2.7%
2.3%
1.9% 2.1%
2.3%
2.0% 2.0% 1.9% 1.9%
2.1%
1.9% 1.9%
-%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26
49.9%
41.2% 42.6% 43.2%
44.6%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
FY12 FY13 FY14F FY15F FY16F
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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Total expenses are forecast to rise 35% in FY14 to $11.6m with employee expenses up 43%
contributing to the majority of the increase. The full year impact of additional headcount and 25% of
performance fees accrued to the investment team are the reasons behind this increase. Blue Sky is
highly operationally leveraged as increasing revenue from AUM growth will largely fall to the bottom line.
B a l a n c e S h e e t & D i v i d e n d
Blue Sky declared 6c final dividends for both FY12 and FY13. We have assumed FY14 final dividend to
increase to 7c, before rising to 8c in FY15 due to earnings growth from rising AUM and performance fee
earned. The company maintains a strong balance sheet that will provide capacity for further co-
investment in new fund offerings, which is common practice for alternative asset managers. After the
recent capital raising, Blue Sky holds approximately 86c per share of net cash and investments on its
balance sheet.
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
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INVESTMENT CASE
Aggressive asset under management (AUM)
growth targets and highly scalable business
model
Blue Sky has grown its assets under management aggressively
through strong investment returns and new fund inflows through
its database of retail, high net worth and institutional investors.
The company currently manages more than $550m of AUM and
management is targeting $2bn AUM by FY17. Growth in AUM
and investment returns directly drives management and
performance fee income. With a relatively fixed cost base,
incremental revenue will have a magnified impact on profits.
Recurring management fee revenue with
upside from performance fees
Funds management businesses are high quality recurring
revenue business models. Management fee revenue is
calculated quarterly and recurring in nature. Significant upside
is from performance fees, earned when funds are wound up, in
the case of the Private Equity and Real Estate funds or
periodically for the water entitlements and hedge funds.
Funds management industry continues to
enjoy tailwinds
The Australian funds management industry has enjoyed FUM
growth of more than 10% per annum over the past 25 years
and at a similar rate over the past 10 years. Mandated
superannuation contributions are underpinning this growth. The
alternative asset classes should see above-industry FUM
growth as institutional investors and SMSF trustees in Australia
are comparatively underweight in their allocations to the
alternative space. A greater understanding of the roles that
alternative assets can play within a portfolio should see
increased allocation in the future.
Investments in its own funds to further
augment value for shareholders
Blue Sky maintains an alignment of interest with investors in its
funds by co-investing and will often take management and
performance fees as additional units in lieu of cash. These
investments which are held on the balance sheet give investors
further indirect access to the performance of the underlying
investments. Blue Sky Limited holds approximately 86c worth of
net cash and investments on its balance sheet.
Experienced management and investment
team
The management and investment teams have extensive
experience in private equity, investment banking, commodities
trading, management consulting and industry experience.
Discount to valuation
Blue Sky trades at a discount to our intrinsic valuation of $2.96.
There is significant further upside in future years as AUM
grows.
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May 2014 www.microequities.com.au 24
RISK ANALYSIS
Blue Sky Limited operates within the Australian funds management industry. The company is indirectly
exposed to financial market performance, asset price changes and investor sentiment towards risk assets. We
have identified the following risk factors related to Blue Sky: (list is not exhaustive)
Investment performance of funds managed by Blue Sky determines how the amount of performance fees
earned by Blue Sky Limited, a key factor in AUM growth and the amount of management fee earned by the funds.
It is also a key determinant of whether Blue Sky is able to raise money for new funds in the future.
Ability to increase assets under management (AUM) through raising funds. Blue Sky relies on growing its
AUM to drive growth in revenue (management and performance fees) and profits. Growth in AUM is reliant to
developing a track record of investment outperformance, marketing the funds to individuals and having business
development team that can foster a relationship and win mandates from large institutional investors. Blue Sky will
continue to grow AUM by developing new funds and marketing to existing investors. Similarly, poorly investment
performance or loss of investor confidence could result in poor take-up of new fund offerings, redemptions and loss
of AUM. This would have a negative impact on the Group’s profitability due to the high proportion of fixed costs
within the business.
Ability to deploy funds into suitable investments may be difficult at times when asset prices are above fair value
and there is increased buyer competition for these assets. For example, elevated levels of investor demand for
development sites in Brisbane may hamper Blue Sky Real Estate division’s ability to purchase new sites. Strong
equity market valuations may lead to higher prices demanded by vendors of private companies and this would
hamper Blue Sky’s Private Equity team in deploying capital at reasonable valuations. Inability to deploy funds could
lead to funds being returned to investors resulting in a fall in AUM, management and performance fees.
Regulatory changes. Blue Sky operates within the financial services industry which is heavily regulated. One such
requirement under the ASFL is the need to keep aside regulatory capital in the form of net tangible assets (NTA) on
the balance sheet equivalent to 0.5% of FUM, up to a maximum of $5m. Changes to regulatory capital
requirements and regulations around AFS licenses may have an impact on Blue Sky.
Key personnel risk. The performance of Blue Sky’s funds and ultimately the fees earned by managing those
funds are dependent on the skills of key investment personnel to identify suitable investment opportunities. Blue
Sky invests in alternative assets which requires specialist knowledge and expertise. High staff turnover may lead to
poor investment performance and loss of mandates from large institutional investors. Furthermore, key senior
management personnel are also crucial to setting the strategic direction for the business.
Increased competition from other asset managers whom may also develop alternative asset class funds targeted
at high net worth and institutional investors. Increased competition may lead to slower AUM growth or the need for
increased marketing spend to drive fund inflow. Increased number of competing funds may also lead to competition
in deploying capital as mentioned above.
General economic and market conditions. Poor economic or financial market conditions could lead to poor
investment performance and a lack of investor appetite for Blue Sky’s fund offerings. This will have a negative
impact on the amount of performance and management fee earned and AUM. One specific risk is during extreme
market conditions, liquidity may be constrained and the funds may find it hard to sell assets at reasonable prices.
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
8th
May 2014 www.microequities.com.au 25
VALUATION | RECOMMENDATION
DDCCFF VVaalluuaattiioonn
OOuurr DDCCFF mmooddeell pprroovviiddeess uuss wwiitthh aa $$22..9966 vvaalluuaattiioonn ffoorr BBlluuee SSkkyy LLiimmiitteedd rreepprreesseennttiinngg aa 2233%% pprreemmiiuumm ttoo tthhee ccuurrrreenntt
mmaarrkkeett pprriiccee ooff $$22..4400.. WWee hhaavvee uusseedd aa ffuunnddaammeennttaall BBEETTAA ooff 11..1188 aanndd aa WWAACCCC ooff 1122..7700%%.. WWee hhaavvee uusseedd aa lloonngg--tteerrmm
ggrroowwtthh rraattee ooff 33%% iinn oouurr DDCCFF mmooddeell..
DDCCFF VVaalluuaattiioonn BBrreeaakkuupp
RReellaattiivvee PPEE VVaalluuaattiioonn
WWee hhaavvee uunnddeerrttaakkeenn aa rreellaattiivvee vvaalluuaattiioonn uussiinngg aa bbrrooaadd ccrroossss--sseeccttiioonn ooff AASSXX lliisstteedd ffuunnddss mmaannaaggeemmeenntt bbuussiinneesssseess.. WWee
hhaavvee ccaallccuullaatteedd tthhee sseeccttoorr mmuullttiippllee bbaasseedd oonn PPEE lleessss ccaasshh aanndd ffiinnaanncciiaall aasssseettss hheelldd oonn bbaallaannccee sshheeeett.. UUssiinngg aa ffoorreeccaasstt
FFYY1144 mmuullttiippllee ooff 1111..99xx,, wwee hhaavvee ddeerriivveedd aa rreellaattiivvee vvaalluuaattiioonn ooff $$11..9933 ppeerr sshhaarree,, rreepprreesseennttiinngg aa 2200%% ddiissccoouunntt ttoo tthhee
ccuurrrreenntt mmaarrkkeett pprriiccee ooff $$22..4400..
PPeeeerr ggrroouupp ffiinnaanncciiaall ssuummmmaarryy ((aass aatt 0077//0055//22001144))
IInnvveessttmmeenntt OOppiinniioonn
WWee iinniittiiaattee ccoovveerraaggee wwiitthh aa HHOOLLDD rreeccoommmmeennddaattiioonn aanndd aa pprriiccee oobbjjeeccttiivvee ooff $$22..4455.. TThhee pprriiccee oobbjjeeccttiivvee iiss bbaasseedd oonn aa
ccoommbbiinnaattiioonn ooff tthhee DDCCFF vvaalluuaattiioonn ooff $$22..9966 aanndd oouurr rreellaattiivvee ppeeeerr vvaalluuaattiioonn ooff $$11..9933 wwhhiicchh wwee hhaavvee aapppplliieedd aa ppeeeerr ggrroouupp
aavveerraaggee mmuullttiippllee oonn FFYY1144FF eeaarrnniinnggss ooff 1111..99xx.. BBlluuee SSkkyy pprroovviiddeess eexxppoossuurree ttoo tthhee ggrroowwiinngg aalltteerrnnaattiivvee aasssseett mmaannaaggeemmeenntt
sseeccttoorr wwhhiicchh iiss uunnddeerrppiinnnneedd bbyy ggrroowwtthh iinn tthhee oovveerraallll AAuussttrraalliiaann ffuunnddss mmaannaaggeemmeenntt sseeccttoorr aanndd nnooww iinnccrreeaassiinngg aallllooccaattiioonn
bbyy ssuuppeerr ffuunnddss aanndd iinnddiivviidduuaall iinnvveessttoorrss ttoowwaarrddss aalltteerrnnaattiivvee aasssseett ccllaasssseess.. BBlluuee SSkkyy hhaass ddeemmoonnssttrraatteedd aa 77 yyeeaarr ttrraacckk
rreeccoorrdd ooff ssuussttaaiinneedd ssttrroonngg iinnvveessttmmeenntt rreettuurrnnss aaccrroossss iittss aasssseettss ccllaasssseess wwhhiicchh wwiillll aassssiisstt tthhee ccoommppaannyy ttoo ccoonnttiinnuuee ggrrooww
iittss aasssseettss uunnddeerr mmaannaaggeemmeenntt.. TThhee mmaajjoorriittyy ooff tthhee ffuunnddss eeaarrnn ppeerrffoorrmmaannccee ffeeeess aanndd BBlluuee SSkkyy aallssoo ccoo--iinnvveessttss iinn iittss oowwnn
ffuunnddss aalloonngg wwiitthh iittss uunniitt hhoollddeerrss,, pprroovviiddiinngg aalliiggnnmmeenntt ooff iinntteerreesstt aanndd ffuuttuurree iinnvveessttmmeenntt rreettuurrnnss ffoorr sshhaarreehhoollddeerrss oonn ttoopp ooff
iittss ggrroowwiinngg ffuunnddss mmaannaaggeemmeenntt bbuussiinneessss.. WWee sseeee ssiiggnniiffiiccaanntt ggrroowwtthh iinn iinnttrriinnssiicc vvaalluuee iinn BBlluuee SSkkyy aass iittss AAUUMM ggrroowwtthh
ttrraajjeeccttoorryy ccoonnttiinnuueess..
Key assumptions
EEqquuiittyy BBeettaa:: 11..1188 DDeebbtt:: $$77..11mm
RRiisskk ffrreeee rraattee:: 33..8833%% KKdd:: 66..55%%
RReettuurrnn oonn EEqquuiittyy:: 1122..7700%% WWAACCCC:: 1122..2299%%
LLTT GGrroowwtthh RRaattee:: 33..0000%%
PV SUM 33%
Terminal Value 38%
Cash + investments
29%
23.2
17.6 17.0 14.2
9.5 9.3 9.2 8.9
3.2
11.9
MFG PTM BLA TRG AEF HHL CNI KAM APD
PE less cash and investments Average (ex-BLA)
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
8th
May 2014 www.microequities.com.au 26
PRICE OBJECTIVE & RECOMMENDATION HISTORY
Changes to recommendations and/or price objectives
Date Recommendation Price at time of Rec Price Objective
08/05/2014 HOLD $2.40 $2.45
MAJOR SHAREHOLDERS
BLA – Top 20 Shareholders as at 6 May 2014.
SHARES HELD ISSUED CAPITAL
11.. BBLLUUEE DDOOGG GGRROOUUPP PPTTYY LLIIMMIITTEEDD 10,044,338 1177..9922%%
22.. AADDCCOOCCKK PPRRIIVVAATTEE EEQQUUIITTYY PPTTYY LLTTDD <<AADDCCOOCCKK PPRRIIVVAATTEE EEQQUUIITTYY AA//CC>> 5,410,520 99..6655%%
33.. AAUUSSTT EEXXEECCUUTTOORR TTRRUUSSTTEEEESS SSAA LLTTDD <<TTEEAA CCUUSSTTOODDIIAANNSS LLIIMMIITTEEDD>> 2,815,166 55..0022%%
44.. PPHHEENNOOMMEENNOONN HHOOLLDDIINNGGSS PPTTYY LLIIMMIITTEEDD 1,800,480 33..2211%%
55.. LLLLOOYYDD BBRRYYAANNTT HHOOBBAARRTT PPTTYY LLIIMMIITTEEDD 1,410,964 22..5522%%
66.. DDOOCCHHAARRTT HHOOLLDDIINNGGSS PPTTYY LLIIMMIITTEEDD <<MMCCNNAABB FFAAMMIILLYY AA//CC>> 1,123,504 22..0000%%
77.. GGEEOOMMAARR SSUUPPEERRAANNNNUUAATTIIOONN PPTTYY LLTTDD <<CCHHAAPPMMAANN SSUUPPEERR FFUUNNDD AA//CC>> 1,101,750 11..9977%%
88.. EEMMEERRAALLDD HHIILLLL HHOOLLDDIINNGGSS PPTTYY LLTTDD 999,460 11..7788%%
99.. MMRR KKIIMM SSCCOOTTTT MMOORRIISSOONN 921,126 11..6644%%
1100.. MMRR KKEEIIRRAANN DDAANNIIEELL FFOOSSTTEERR <<TTHHEE WWEESSLLEEYY IINNVVEESSTTMMEENNTT AA//CC>> 869,000 11..5555%%
1111.. CCHHRRIISSTTOOPPHHEERR SSTTAACCEEYY && PPAATTRRIICCIIAA AANNNN SSTTAACCEEYY 778,529 11..3399%%
1122.. RRNNAAJJ PPTTYY LLTTDD <<RRNNAAJJ SSTTAAGGGG SSUUPPEERR FFUUNNDD AA//CC>> 657,143 11..1177%%
1133.. RROOSSYYAABBBBEEYY PPTTYY LLIIMMIITTEEDD <<MMOONNTTGGOOMMEERRYY FFAAMMIILLYY SS//FF AA//CC>> 523,105 00..9933%%
1144.. MMRRSS SSUUSSAANN MMAARRYY TTAAYYLLOORR 508,587 00..9911%%
1155.. SSTTEEEENNHHUUIISSEENN SSUUPPEERR PPTTYY LLTTDD 477,832 00..8855%%
1166.. EEQQUUIITTAASS NNOOMMIINNEEEESS PPTTYY LLIIMMIITTEEDD 466,666 00..8833%%
1177.. BBOONNDD SSTTRREEEETT CCUUSSTTOODDIIAANNSS LLIIMMIITTEEDD <<SSTTCCRR -- VV3388114433 AA//CC>> 427,446 00..7766%%
1188.. RROOBBEERRTT IIAANN TTHHOOMMAASS && VVIICCTTOORRIIAA JJAANNEE TTHHOOMMAASS 423,732 00..7766%%
1199.. HHSSBBCC CCUUSSTTOODDYY NNOOMMIINNEEEESS ((AAUUSSTTRRAALLIIAA)) LLIIMMIITTEEDD 404,749 00..7722%%
2200.. CCIITTIICCOORRPP NNOOMMIINNEEEESS PPTTYY LLIIMMIITTEEDD 361,561 00..6655%%
TToottaall ffoorr TToopp 2200 3311,,552255,,665588 5566..2255%%
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
8th
May 2014 www.microequities.com.au 27
FINANCIAL SUMMARY
B A L A N C E S H E E T S U M M A R Y ( $ m ) C A S H F L O W S U M M A R Y ( $ m )
Year Ending June 2013A 2014F 2015F Year Ending June 2013A 2014F 2015F
Cash & cash equivalents 5.6 25.7 17.4 EBITDA 5.8 8.1 9.4
Trade and receivables 2.2 3.1 3.7 Decre./(Incr.) in work. Cap (0.4) (0.1) (0.2)
Other assets 0.2 0.2 0.2 Net Int. 0.1 (0.3) (0.4)
Total Current Assets 7.9 29.0 21.3 Incr/(Dcrse) in Provisions (0.1) - -
Receivables 1.2 1.2 1.2 Taxes Paid (1.0) (2.4) (2.8)
Investments accounted using equity method
3.6 - - Other Op. Cash items (3.4) - -
Financial assets at FV through P/L
4.1 28.9 38.9 Cash from Operations 1.0 5.4 6.0
PPE 0.1 0.3 0.4
Intangible assets 4.9 4.8 4.8 Payment for acquisitions - - -
Deferred tax assets 0.0 0.0 0.0 Payment for investments (0.0) (18.3) (10.0)
Total Non-Current Assets 13.9 35.3 45.3 Payment for PPE - (0.3) (0.2)
TOTAL ASSETS 21.8 64.3 66.6 Payment for intangibles (0.1) (0.2) (0.1)
Trade and other payables 2.3 3.1 3.5 Proceeds of disposal 0.5 - -
Borrowings 0.1 7.1 7.1 Cash Flow From Invst. 0.4 (18.8) (10.3)
Deferred revenue 0.6 0.6 0.6
Income tax 0.9 0.9 0.9 Incr/(Decr) in Equity - 31.4 -
Employee benefits 0.3 0.3 0.3 Share issue costs - (0.1) -
Total Current Liabilities 4.1 12.0 12.4 Proceeds from borrowings - 7.0 -
Provisions 0.0 0.0 0.0 Loans (to)/from related parties
(0.4) (2.4) -
Borrowings - - - Payment of finance lease and HP liability
(0.1) (0.0) -
Deferred tax liabilities 0.4 0.4 0.4 Dividends paid (2.0) (2.3) (4.0)
Total Non-Current Liabilities
0.4 0.4 0.4 Cash Flow From Fin (2.4) 33.6 (4.0)
TOTAL LIABILITIES 4.5 12.4 12.8
NET ASSETS 17.3 51.9 53.8 Net Cash +/(-) (1.0) 20.2 (8.3)
Equity FCF 1.0 5.4 6.0
Operating CF per share 0.02 0.09 0.11
P R O F I T & L O S S S U M M A R Y ( $ m ) P R O F I T A B I L I T Y R A T I O S
Year Ending June 2013A 2014F 2015F Year Ending June 2013A 2014F 2015F
RReevveennuuee 14.1 19.1 21.7 SSaalleess (($$’’mm)) 14.0 18.9 21.5
EExxppeennssee (8.6) (11.6) (13.0) %% CChhgg YYooYY 10% 35% 14%
++ NNeett IInntteerreesstt EExxppeennssee 0.0 0.3 0.4 PPrriiccee//SSaalleess ((xx)) 9.8x 7.2x 6.4x
++ DDeepprreecciiaattiioonn && AAmmoorrttiissaattiioonn 0.3 0.3 0.3 EEPPSS ((ccppss]] 11.0 9.0 10.4
EEBBIITTDDAA 5.8 8.1 9.4 %% CChhgg YYooYY -% -18% 15%
%% CChhgg YYooYY (7%) 40% 15% PP//EE ((xx)) 21.8x 26.6x 23.0x
EEBBIITTDDAA MMAARRGGIINN 41% 43% 43% EEnntteerrpprriissee VVaalluuee (($$’’mm)) 131.4 118.3 118.3
DDeepprreecciiaattiioonn && AAmmoorrttiissaattiioonn (0.3) (0.3) (0.3) EEVV//EEBBIITT ((xx)) 23.6x 15.1x 13.0x
EEBBIITT 5.6 7.8 9.1 EEVV//EEBBIITTDDAA ((xx)) 22.6x 14.5x 12.6x
EEBBIITT MMaarrggiinn 39% 41% 42% DDPPSS ((¢¢)) 6.00¢ 7.00¢ 8.00¢
NNeett IInntteerreesstt EExxppeennssee (0.0) (0.3) (0.4) DDiivviiddeenndd YYiieelldd ((%%)) 2.5% 2.9% 3.3%
PPrrooffiitt BBeeffoorree TTaaxx 5.5 7.5 8.7 RROOEE ((%%)) 22% 11% 12%
TTaaxx (1.7) (2.4) (2.8) DDeebbtt ttoo AAsssseett 0% 12% 12%
NNPPAATT 3.8 5.1 5.9 DDeebbtt ttoo EEqquuiittyy 0% 15% 15%
BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT
microequities.com.au
IMPORTANT D ISCLOSURE INFORMATION: Produced by Microequities Research Pty Ltd (a subsidiary of Microequities Pty Ltd AFSL287526) in accordance with section
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RECOMMENDATION GUIDE
Recommendation Market Price undervalued/overvalued to Microequities price objective
Strong Buy Above 40%
Buy 20 to 40%
Hold 0 to 20%
Sell 0 to -20%
Strong Sell Greater than 20%
ADDITIONAL VOLUNTARY D ISCLOSURE BY M ICROEQUITIES*
Investment Banking Staff Interest Analyst personal Interest Disclosure to Company Business Relationship
NO NO NO YES YES
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document. Additional disclosure:
- Microequities Research Pty Ltd has a research distribution agreement with Blue Sky Limited.
- We and our affiliates, officers and directors, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.