As global passive investment vehicles hoover up the bulk of available fund flows to the detriment of active equity managers, there is one asset class that remains immune to the negative outcomes of the passive versus active debate.
Alternative asset managers are enjoying a boom in fund inflows as institutional investors, sovereign wealth funds and pension funds tip increasing amounts of money into illiquid assets in a bid to achieve double-digit returns. In Australia, alternatives are being embraced by institutional investors and self-managed super funds.
There is no better example of the surge in interest in alternative assets than Blue Sky Alternatives, a Brisbane manager which has shot the lights out for the past five years. This week it revealed that its total funds under management had hit $3 billion, which is up about $1 billion from a year ago. It lifted its funds under management by about $1 billion in the previous year.
Blue Sky has about $1 billion in private equity, $1 billion in real estate and about $1 billion in water and agriculture. It has a small amount in hedge funds.
Blue Sky is well on the way to meeting its target of having $10 billion in funds under management and being the home-grown version of Wall Street alternative asset giants Blackstone and KKR.
Any company with the words Blue Sky in its name will have its fair share of sceptics given that legendary journalist Trevor Sykes created Blue Sky Mines to educate dodgy directors on the skills needed to rip-off unsuspecting punters seeking their fortune in penny dreadfuls.
The Sykes textbook on how to rip-off people in speccy mining stocks includes the use of misleading ore figures, doctored mine site photos, fictional exploration data and other creative ways to fool the gullible.
There is no suggestion that Blue Sky Alternatives has any of these features in its operations. First, it is not involved in mining. Second, its accounts are audited by respected firms and, third, its board includes respected Queensland business people.
But it has had its fair share of sceptics. In October and November last year, the short interest in the stock was equal to about 3.5 per cent of the issued capital.
Also, over the years Blue Sky has come under attack from bloggers and analysts claiming it is too reliant on asset revaluations and that its investment vehicles carry too much debt.
Chanticleer believes there is an element of the tall poppy syndrome wrapped up in the negativity towards Blue Sky. Many of the rumours have been proven to be wrong.
Chief executive Rob Shand is happy to deal with all the criticisms head-on. His arguments are quite persuasive, as shown by the fact that the level of institutional investment in Blue Sky's range of funds has jumped from zero five years ago to 37 per cent in 2016.
In response to the claim that returns are driven by unrealistic valuations of assets, Shand says that 28 of the 31 asset realisations made by Blue Sky since 2006 have been at valuations higher than book value. He says this shows an inherent conservatism in the accounting for the value of assets.
In response to claims that valuations are too easily pumped up, Shand says each asset must go through four separate sets of eyes. It starts with KPMG as valuer, then EY as auditor, then the board of the fund and then the board of the head stock, Blue Sky Alternatives.
Blue Sky is best known for its stunning returns from its Water Fund, which invests in water in the Murray Darling Basin. Shand says that the doubters who question the water business should look at the value of water globally. Water in Australia sells for about $2000 a megalitre compared to $8000 a megalitre in California.
In relation to the criticism of too much debt in Blue Sky's private equity investments, Shand says 16 out of 25 PE investments have no debt.
At one stage rumours circulated about the ability of a company called Wild Breads, which supplies Coles and Woolworths, to remain a going concern. Shand says it has been growing so fast the company had to invest in more plant and equipment. This required the company to borrow to expand. He says that is a good problem to have.
Blue Sky has copped criticism in some quarters for its expansion into student accommodation. But Shand says this real estate business, which is in partnership with Goldman Sachs, is performing extremely well.
In Australia, the champion of the alternative asset class is the country's largest investor, the Future Fund. It has about 29 per cent of its total assets of $130 billion in alternatives, provided you define this as including private equity. That is the same as the allocation to equities.
