Profits flow as Blue Sky Alternatives Access Fund beats the odds

Profits flow as Blue Sky Alternatives Access Fund beats the odds

Blue Sky Alternatives Access Fund (ASX: BAF) has seen encouraging financial results as it continues to look for a new manager; a move that would allow it to bid good riddance to its parent enveloped in controversy.

The company saw a significant increase in expenses in FY19 due to the malaise that has surrounded Blue Sky Alternative Investments (ASX: BLA), whose subsidiary BSAAF has a management services agreement (MSA) with BAF.

BAF's external audit fees increased substantially after BLA went into receivership in May and had its reporting obligations deferred, while the increased risk profile surrounding the broader Blue Sky group has also lifted insurance premiums for directors and officers.

Legal fees have gone up too as BAF works towards presenting a replacement manager at an extraordinary general meeting (EGM) it aims to host in the last quarter of 2019. 

Wilson Asset Management will likely be one of five pre-selected candidates to replace BSAAF, which is represented by receivers and managers KordaMentha with US vulture fund Oaktree also taking part in the discussions.

"Since 20 May 2019, the Chair of the Company, as well as Oaktree and KordaMentha, have received a number of approaches from organisations interested in becoming the Alternatives Fund's investment manager," BAF said.

"The Directors continue to believe that it is in the best interests of all shareholders for an orderly replacement manager transition to occur."

As part of Blue Sky's restructuring it was announced late last month that an Oaktree subsidiary would take control of the group's real assets, including the Water Fund and the Strategic Australian Agriculture Fund in which BAF has a "very significant stake".

If BSAAF doesn't end up supporting BAF's proposal for a new manager candidate, BAF may need to find a way to terminate the agreement or simply wind down the company and return capital to shareholders.

These are issues that have loomed large, yet BAF's FY19 results announced today moved in a positive direction with revenue up 26 per cent at $11.17 million and net profit after tax (NPAT) rising 33.33 per cent to $6.71 million.

The rise and fall of Blue Sky: A timeline from ASX powerhouse to pariah

The company exited seven funds during the period and described these departures as strong, even though overall investment performance for the year was "disappointing".

"Whilst the Blue Sky Water Fund performed strongly, the closed-ended funds in all asset classes, did not meet expectations," BAF said.

"For FY19, the Company received proceeds of $24.2 million from the realisation of closed-end fund investments and $4.4 million in distributions."

The group reiterated that no external administrators have been appointed to BSAAF or or any other subsidiary of BLA.

"The Board continues to be engaged in extensive discussions and activities, including receiving professional advice to ensure the interests of the Company are adequately protected," the company said.

"In FY19, the Company has continued to see its share price trade significantly below the NTA of the Company, albeit in a more stable range.

"In order to address this, the Company has implemented a range of decisions throughout the year including the continuation of the share buy-back program.

As at 30 June the company's net assets were worth $221.2 million, but its market capitalisation this morning was only worth $162.7 million.

"We believe that once the replacement manager process has successfully completed the investment case for the Company will begin to normalise and the Board and its new lead manager will work to significantly reduce the discount to NTA which the current BAF share price presently experiences," the company said.

In FY19 BAF had $51.9 million tied up in the water fund plus another $36.9 million in agricultural investments, with real assets making up 39 per cent of the total portfolio.

BAF sold retirement living investments in October 2018 with an internal rate of returns (IRRs) of 12-20 per cent, and by the end of FY19 it had 22 per cent of its investments in private real estate.

In addition to 13.1 per cent held in cash, the company had 25.6 per cent in private equity with key shareholdings including: a co-investment venture capital fund; GM Hotels Group; distributor Quality Food Services (QFS); US battery storage developer esVolta;  IT services company Digital Lifecycle Group; food manufacturer Birch & Waite; NZ-based Active Adventures; Better Medical; Sunfresh Salads; online wine retailer Vinofomo; Shopper Media Group; a US metropolitan digital billboard company; Wild Breads; Origo Education; and Shoes of Prey.

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