Listed investment company Blue Sky Alternatives is close to signing a management deal with Geoff Wilson’s Wilson Asset Management, after a “challenging” year where the gap between the fund’s net tangible assets and share price widened.
The decision underscores the pressure on investment managers of underperforming listed investment companies to reconsider their structures, as a significant number of LICs continue to trade at discounts to the value of their underlying assets.
Blue Sky Alternatives has reached key commercial terms to transfer management rights to Wilson Asset Management, although final terms for a binding deal are yet to be agreed.
Chairman Michael Cottier acknowledged to shareholders at the LIC’s annual shareholder meeting that the decision to sign a management deal with Wilson Asset Management bookends a difficult year.
“As you will appreciate, it has been another challenging year for the company and shareholders,” Mr Cottier said.
Investment manager Blue Sky Alternative Investments managed more than 80 funds when it was targeted by an activist short-seller attack in early March last year. Despite its rebuttal of allegations about the true nature of fund performance, the value of some of its investments was subsequently slashed, including in childcare and real estate.
When receivers were appointed in May, the asset manager’s market capitalisation had shrunk to $14 million from a peak of nearly $1 billion. In July, its agriculture and water funds were transferred to US giant Oaktree, which put it into receivership.
Shareholders of the LIC have been waiting for a year for news on its future management plans after negotiations with an entity owned by Pinnacle Investment Management and Andrew Champion collapsed.
The LIC had warned mid-month that fresh negotiations to appoint a new manager were “incomplete” and that other options such as an orderly wind down of the portfolio were under consideration.
Back to a billion
Mr Wilson told the meeting that his aim was to get the business to a $1 billion firm, saying “I see no reason” why that wouldn’t be possible.
The veteran fund manager acknowledged that a shift into the alternatives space would be a new avenue for Wilson Asset Management but appeared undaunted by the task.
“There is enormous demand for the alternative space in Australia,” he said. “Our plan is to get Blue Sky trading at true value – to get the share price to reflect the NTA [net tangible assets].” Blue Sky’s LIC trades at a 22 per cent discount to NTA.
Mr Wilson takes the view that the long process to appoint a manager has “tightened up the share register and all the stale bulls and non-believers have gone”.
He said on the sidelines of the annual meeting that WAM planned to charge a 1 per cent management fee for a five-year agreement, and would not charge a performance fee.
“We will enter into a five-year contract with the company. If we’re adding significant value in five years, we may well ask for a performance fee but we need to prove ourselves first,” he said.
Wilson Asset Management has been interested in managing Blue Sky’s LIC for more than a year. Mr Wilson expressed disappointment last November that the company did not put his firm’s proposed management agreement to a shareholder vote.
Mr Wilson wrote to the LIC’s shareholders ahead of last year’s annual shareholder meeting, telling them he would vote against the re-election of independent directors Peter Wade and Paul Masi, and all other resolutions at the AGM.
It isn’t the first time WAM has stepped in when an LIC has found itself unable to address its NTA discount.
WAM Capital took over $120 million listed investment company Wealth Defender in August last year after it was unable to address its discount. The LIC was previously managed by Perennial Value.
LICs in focus
The Blue Sky LIC’s management change follows an intense period of activity in the space. This month. the investment manager behind global LIC Antipodes Global rebuffed demands from a handful of activist shareholders to wind up.
Ellerston Global Investments decided late last week that it will convert its LIC to an unlisted investment trust to allow investors to cash out of the fund at the underlying value of the assets.
by Sarah Turner