One day when I was working at Eureka Report, Alan Kohler asked me to sit in on a live CEO interview he was doing.
The CEO was an alternative asset manager from Brisbane who happened to have a listed investment company which I covered, Blue Sky Alternatives Access Fund.
I pretty much sat there like a third wheel.
Sugar-coated business models
However, after the interview, I did participate in three kilos of chocolate-coated macadamia nuts sent by Blue Sky after the interview. I recall the marketing team really enjoying them.
But context here is important: one of Blue Sky’s investments was a macadamia farm.
Blue Sky also held assets such as Beach Burrito (I found one is still open in Newcastle on Darby Street – pretty good gauc to be fair), Scape student accommodation, Shoes of Prey (no longer with us) and Vinomofo.
You’ve probably already guessed it: nuts, shoes, burritos… how could this investment possibly go wrong?!
Sure enough, Blue Sky came spectacularly unstuck.
At its peak, Blue Sky had a market cap of $1.2 billion and reported funds under management of $3.9 billion.
A report from US short seller, Glaucus Research, alleged the true figure of Blue Sky’s fee generating funds under management was closer to $1.5 billion – not $3.9 billion. Meaning, Glaucus alleged Blue Sky was suggesting the value of the ‘stuff’ it managed (and applied its fee to) was more than twice the reality.
What followed was a free falling share price, and more allegations of the company only being profitable due to excessive entry and admin fees charged on its private equity deals.
Blue Sky was a zero.
Blue Sky’s carcass
Picking over the carcass of Blue Sky came legendary US investor Howard Marks and, picking up the pieces of the LIC was Geoff Wilson and his WAM Funds Management business – probably best known for its $1.7 billion WAM Capital Ltd (ASX: WAM) investment company.
On the 14th of October 2020, Blue Sky Alternatives Access Fund found itself with a new manager.
WAM Alternative Assets Limited (ASX: WMA) was born.
This interview with WMA Chairman, Michael Cottier – who is still Chairman today, by the way – is a great window into the time when the deal was being negotiated, and the mess that was to be untangled.
Where this plot thickens…
Here we are in 2025. This story is still giving. And it’s probably not what you think.
What many investors seem to have totally missed is that when the deal was struck with the Wilson team, the (surviving) Blue Sky board members put in place a few stipulations…
From his announcement to shareholders on the 27th of August 2020, Chairman Cottier announced a ‘Premium Target‘ stipulation:
“The principle of the Premium Target is simple: the Company’s [WMA] share price needs to trade at a premium to its pre-tax net asset value for a period of one month for it to be achieved. If this does not occur at least three times during the next five years, shareholders will automatically have the right to vote to terminate the arrangements with WAMI, and to liquidate the Company.“
That five-year period is due in October.
And guess how many times the WMA LIC has traded at a premium?
Zero.
This came to my attention after I had scheduled the recording of a podcast with the new portfolio manager of WMA. I went looking for details on fees to see if there was a performance fee – there isn’t one – but this really caught my attention…
Using month-end share prices and the reported pre tax NTA, WMA has averaged a discount to NTA of 13.8%. Currently, the discount to last reported NTA is 16%.
When WAM took the reigns from Blue Sky, it took on ~3,300 shareholders and some very illiquid investments (it can be hard to sell assets buried inside an alternatives fund because they are real businesses, not trading on a stock exchange).
It’s been a commendable effort for the Wilson team. And they have been compensated with management fees to the tune of ~$10,800,000.
So here’s my question…
If you are a long-suffering investor in the WMA/Blue Sky portfolio, would you consider getting out with you money in tact and put an end to the saga? Remember, when a fund that trades at a 16% discount to its share price is wound up – that’s a ~16% return just for selling the assets and returning the money to investors…
If, however, the fund keeps going it’s worth thinking about the track record…
Since inception of the original LIC to today, the total shareholder return has been 3.52% per year. It listed at $1, trades today at $1 and has paid $0.469 in dividends.
Who would fault investors for voting to wind up the company, get the 16% uplift and move on? I certainly wouldn’t, that’s a lot of burritos.
At the last AGM, Cottier addressed the Premium Target and stated it was the board’s opinion that terminating the agreement would not maximise shareholder value.
Come the next AGM, it will be a case study for loss aversion and prior to that it’s going to make for a very interesting episode of the Australian Investors Podcast.
P.S. I (nor Rask) have no dog in this fight. It’s just a fascinating story of what can happen when shareholders don’t (or do in the case of people investing to capture the discount if they’re betting on it being wound up) read the fine print.
P.P.S. here’s a neat summary of the key players.
