Oaktree to invest $36m in Blue Sky through convertible loan note

The embattled Australian fund manager will use the capital for co-investments and leverage Oaktree's reputation with prospective LPs.

Brisbane-based fund manager Blue Sky Alternative Investments has agreed a deal with Oaktree Capital Management that will see the US firm invest A$50 million ($36.1 million; €40.0 million) in the business.

Oaktree will make the funds available through a seven-year senior secured loan note facility with the right to convert the amount owing into equity in Blue Sky, capped at 30 percent of shares on issue at the time.

This would be executed at a conversion price of A$1.87, a 10 percent premium on Blue Sky’s net tangible assets per share of A$1.70 as at June 30 and an 18 percent premium to the last closing price of Blue Sky’s shares on the Australian Securities Exchange of A$1.585 on September 27.

Blue Sky said in an announcement to the stock market that the funds would be used for “co-investments and general working-capital requirements.”

Interim managing director Kim Morison told Agri Investor in August that Oaktree’s investment would provide capital for co-investments and expertise in managing private investments as a listed entity. Another benefit from Oaktree’s investment would come in helping to convince prospective LP clients that Blue Sky is in good shape, he added.

“Reputationally, this is an important thing for us and it’s going to help us grow quicker than we otherwise would,” Morison said.

As part of the arrangement, Oaktree will also receive the right to nominate up to two non-executive directors for appointment to Blue Sky’s board: one nomination when its loan amount represents at least 10 percent of the company’s shares on an ‘as-converted’ basis, and another when there are five or more board members and Oaktree’s loan represents at least 20 percent of the company’s shares on an ‘as-converted’ basis.

Blue Sky also announced that it would establish a group investment committee to approve investments above certain monetary thresholds. Oaktree will have the right to appoint two non-voting observers to this committee.

Morison told Agri Investor today that Blue Sky’s investment committee structure would be tiered, “with a higher level of delegation on deal size.”

“Nothing in the deal with Oaktree is a limit on deployment for real assets with existing mandates, as the mandates themselves are bespoke with the various institutional investors we are engaged with.”

He added that Oaktree would be able to take up board seats upon drawdown of capital.

John Kain, Blue Sky’s chairman, said the investment “reflects the strong fundamentals of Blue Sky’s business model, our management team and our growth outlook. The funds available under the facility will strengthen our capital and liquidity position. In addition, Oaktree’s involvement with our business will enable Blue Sky to tap into the deep expertise and networks of a global leader in alternative asset management.

“We believe that, taken together, these factors will assist Blue Sky to restore its growth path and enhance our ability to pivot to institutional-grade investment mandates across the breadth of our business.”

Blue Sky will seek approval of the conversion rights at its AGM on November 19, with the board to unanimously recommend that shareholders vote in favor of the deal.

In an earlier announcement to the ASX, Blue Sky said it had received no further communication from the Australian Securities and Exchange Commission regarding compliance with its continuous disclosure obligations under section 33 of the ASIC Act 2001. It also said it had received no communication from three legal firms that had advertized for participants in class-action lawsuits in the days following the release of a report by short-seller Glaucus Research Group.

In addition, Blue Sky said that two of the three breaches to its Australian Financial Services Licence that were identified in its 2018 annual report had been rectified and that the third was “in the process of being rectified” with Blue Sky “anticipating no loss to fund investors.”

This third breach concerned incorrectly charged fees and expenses mostly relating to wholesale private real estate and private equity funds, and did not impact any institutional mandates or institutional funds including the Strategic Australian Agriculture Fund or the Water Fund.