Blue Sky Limited - Microequities Asset Management Managed ...microequities.com.au/wp-content/plugins/media-administration/research... · Blue Sky Limited The Sky’s the Limit Evveenntt

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

BLA | INITIATING COVERAGE – THE SKY’S THE LIMIT

8th

May 2014 www.microequities.com.au 2

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


8th


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).


8th


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.


8th


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


8th


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


11 aanndd 22 bbeeddrroooommss AAuugg 1133 –– MMaarr 1155

WWoooolllloooonnggaabbbbaa,,

BBrriissbbaannee

Railway

Terrace $32.5m


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.


8th



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


11,, 22 aanndd 33

bbeeddrroooommss

SSttaaggee 11:: MMaayy 1133 –– JJaann

1144

BBeellggiiaann GGaarrddeennss,,

TToowwnnssvviillllee

Riverside

Gardens $35m


11,, 22 aanndd 33

bbeeddrroooommss

JJuull 1133 –– FFeebb 1144 DDoouuggllaass,, TToowwnnssvviillllee

Centrus One $15m


11,, 22 aanndd 33

bbeeddrroooommss

FFeebb 1133 EEiigghhtt MMiillee PPllaaiinnss,,

BBrriissbbaannee

Riverway

Point $25.4


22 aanndd 33 bbeeddrroooommss DDeecc 1111 CCoonnddoonn,, TToowwnnssvviillllee

Plantations

at Beenleigh $12.5m


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.


8th


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


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.


8th


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


Hedge Funds

Investment Science P/L

SRA 4

SRA 6

SRA 16

Hedge fund division

consists of the

recently acquired ISPL

funds.


8th


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


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.


8th


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


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


8th


Figure 7: Historical Revenue breakdown by division


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.


8th


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


•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


8th


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.


8th


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%


8th


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.


8th


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


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..


8th


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.


8th


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


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%


8th


FY14 & FY15 FORECASTS

Figure 15: BLA – Financial forecast summary


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%


8th


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


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


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


8th


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.


8th


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.


8th


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.


8th


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)


8th


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%%


8th


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%


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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

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