Transcription of Finance News Network Interview with Blue Sky Alternative Investments Limited (ASX:BLA) Managing Director, Mark SowerbyJohn Treadgold: Blue Sky Alternative Investments Limited
(ASX:BLA) is an alternative asset manager with more than $700 million in assets under management, including private equity, private real estate hedge funds and real assets. I’m John Treadgold and joining me today at the ASX Investor Series is the Company’s founder and Managing Director, Mark Sowerby. Mark welcome to FNN.
Mark Sowerby: Thanks for having me John.
John Treadgold: Your first half results were strong compared to the previous period. What was behind the result?
Mark Sowerby: We’re a nine year-old business now, we’re starting to mature. The reality of our business is that the first half tends to be slower than the second. We get a lot of deal flow the second half through our private equity adventure capital. That drives more fees and more revenue and also often more performance as well for exits, so the first half was a great result for us. We would normally expect historically, to break even around that and we also did better than that this year. I think it’s more relevant in terms of our overall development and our revenue growth was excellent, growing by more than double. That’s to be expected I think given the tail winds that we’re experiencing across the business and the sector.
John Treadgold: Can you tell us about the launch last June of the listed Fund and how that has performed in terms of inflows, and what it means for the Company?
Mark Sowerby:It’s a perfect structure for us, I mean listed investment company and we’re long term investors. So we need permanent capital and permanent capital allows us to then go and make great decisions. It stops people from making bad decisions with their own money John. So the LICs (listed investment companies) work for the world we’re trading in a premium to NTA (net tangible assets), it’s an engine room I guess of alternatives.
And we think that it’ll end up being the default alternatives Fund for private wealth, financial planners, self-running super funds, so very much at the wholesale and retail part of the market. And it gives them that diversity that they need across all the different asset classes that we’re in. Really, really happy with how it’s going, it’s done everything we would have hoped. We deployed it quickly which tells you we’ve got plenty of deal flow. And that I guess reflected in our first half result as well, because we’re seeing that deal flow come through our own numbers.
John Treadgold: Mark, can you give us a feel for the characteristics of alternative assets and how you manage liquidity?
Mark Sowerby: I think it’s an interesting question around liquidity. So we’ve got a great slide on our website which shows our investment returns, which we’ll talk about later on. It’s at 15.3 per cent and if you look at that slide, the least liquid assets are private equity adventure capital and they’ve got the highest return. The most liquid are the hedge funds and they’ve got the lowest return, still good returns compounding. So there’s a really big price that you pay for liquidity and I think mostly what alternative is about, is illiquids. So there is no liquidity.
So assume there is none, the liquidity will come from realisations, from exits, from liquidation events. Some of our assets have some liquidity, but the reality is that what we’re really capturing in alternatives, at least in for our business is that illiquidity premium. So liquidity is something that we don’t try to manage at all, in fact we embrace illiquidity. The challenge is to make sure that you get a return for that illiquidity. And too often people have invested in illiquid assets and have been caught and lost money. I think what we’ve demonstrating over nine years is that we’re pretty good at what we do.
John Treadgold: This alternative opportunity is gaining more traction in Australia. How is that pertinent in the current environment?
Mark Sowerby: Alternatives themselves are a huge part of every portfolio. When we kicked off our business in 2006, it was about five or six per cent of peoples’ allocations were alternatives and offshore it was 20 per cent. I mean you didn’t have to be a rocket scientist to work out that eventually Australia was going to start to play in this space. And it’s now moved higher offshore, it’s around 25 per cent; Australia has now gone to 17 per cent John. So we’ve seen that allocation increase.
And then when you look at the list of managers in the alternatives space, there just aren’t very many to choose from, because you need a long track record. The longer our track record goes doing 15 per cent, clearly the more money we’ll attract. So alternative is going to play a much, much bigger part in everybody’s portfolio, including self-managed super institutions right across the board. And so our job is to deliver those great opportunities in that space.
John Treadgold: Your focus on alternative investment opportunities has rewarded investors with a 15 per cent return since inception. Which asset class has led the way?
Mark Sowerby: Well private equity’s led the way because it’s the least liquid. They’ll tell you that they’re the smartest in the group, but that’s not necessarily the case. I think we’ve been able to find some good ideas as well John, so our Water Fund I think particularly is globally unique. We’re playing in agriculture and playing successfully and profitably. Our hedge Fund team have done a great job, they’ve done close to 10 per cent compounding. That puts them in the top quartile globally out of Australia, which is not easy to do.
And of course our real estate team, through the downturn I think the really good thing they did, is they caught the uptick in the property market that we’re all experiencing now. But they also worked really, really hard to preserve capital when it was tough. And I think what you see in those numbers is more a reflection of our ability to stick it out when it’s tough, than it is our ability to make great decisions on the way up.
John Treadgold: You’re the Company’s founder and a lot of your staff have skin in the game, holding significant equity in the business. How important is this to the success of Blue Sky?
Mark Sowerby: I think there’s two parts to that. So absolutely skin in the game and alignment are critical, but owning Blue Sky shares is not enough. So if you’re an investment manager of Blue Sky, we would rather you invested in your Fund that you’re asking people to invest in too, because it’s illiquid. So that means you’re tied up. If you’re in our stock only, then what that means is you can exit the Company and leave and sell your shares when you feel like it.
So it’s helpful for alignment, but it’s not really going to make them stick John and we want them to stick. So we prefer that they invest in their Funds and then if they own stock as well, we’ll either give them options as we continue on. Or for the early guys, they’ve obviously got shares and they care deeply about the business and have been through the tough times. So we’re starting to now enjoy some tail winds which is great, so it’s critical.
John Treadgold: Finally, what are the Company’s goals for the next 12 months?
Mark Sowerby: The way we run the business is we’re a bit Chinese. So we do five year plans and there’re six month bite size chunks. So we have a view that people, if you give a 12 month budget, people will do nothing in the first six months and do it all in the second six months. So we do six month budgets; so for us we think about the next six months. We’ve said we wanted to be in a billion under management, which we’re through. And we want to achieve an $8 to$10 million impact, which we’re on track to do.So all of those things we’re doing in a 15 per cent IRR (internal rate of return).
Looking ahead, we’ve said that in 2017 we would like to get through $2 billion in assets under management. We’d like to have a 20 per cent IRR net and then we think that will lead to a $20 million impact. So they’re the things we think about and then beyond that to 2022, we’re now building at that five year plan. But I think it’s a plan that you really don’t know what’s possible until we get to 2017, because we may be ahead or behind on our goals.I think we’ve built an opportunity now to build the biggest and best alternative asset manager in the country, but it’s an opportunity andwe’ve still got to deliver on it.
John Treadgold: Very good. Mark Sowerby, thank you for joining us on FNN.
Mark Sowerby: Thanks John.
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