Liquid return for Australia’s mini-Blackstone

You might think Mark Sowerby, founder and managing director of listed Australian fund manager Blue Sky Alternative Investments (Blue Sky), is just being modest when he says: “We’re dramatically smaller than Blackstone, but that’s the model. We’re about building a global footprint, but at the moment we’re just at the starting line.”

He has a point though. Having started out in 2006 with a mere $150,000 in assets under management, Blue Sky grew this number to $1 billion earlier this year and is aiming to double up to $2 billion sometime in 2017. However, while the size of available funds is clearly accelerating, a glance at the website of US alternative asset giant Blackstone will confirm that its total assets under management at the end of June this year stood at no less than $333 billion.

But while Blue Sky has a way to go before it achieves the depth of the world’s biggest listed alternatives firms, it has already established an impressive breadth. Having started life as a private equity manager, it has since launched into venture capital, private real estate, hedge funds and real assets. In the latter category the firm has been making a splash with its Water Partners arm, which focuses on water infrastructure and manages two funds established in 2012: the Blue Sky Water Fund and Water Utilities Australia Fund.

WATER ‘DOESN’T FIT’

“Water doesn’t really fit anywhere [in a portfolio],” says Sowerby, in conversation with Infrastructure Investor in London. “It’s unique, but you can’t do without it so it has an infrastructure-like quality.” That comparison extends to investment characteristics that include yield, strong cash flows and capital gain. Since inception, the Blue Sky Water Fund had achieved an annualised performance of almost 19 percent net of fees by the end of July this year.

The strategy encompasses traditional water infrastructure investments but also the quite specific and niche area of water entitlements. This involves buying perpetual rights to a defined water resource such as a river system or aquifer. These rights are issued, regulated and registered by Australia’s state governments – and can be subsequently sold or leased to agricultural, urban and commercial water users.

Sowerby says one investment the firm has made involves taking recycled water from Adelaide in South Australia and pumping it to the McLaren Vale wine-making region around 40 kilometres away to provide irrigation. “We pump it straight to the farmers and they use it on the basis of take or pay contracts,” explains Sowerby. “And there are great expansion opportunities.”

He is hoping that the firm’s water arm may eventually be a beneficiary of the big privatisation wave currently underway in Australia – although it may require some patience:

“New South Wales has a mandate to sell assets and some will be water,” he says. “Things have been held up in Queensland, with some assets taken off the table. Water has a lot of politics around it, but it will happen – there is a big bunch of assets, the governments need money and the asset recycling model is persuasive. So it will happen, although the lead times can be very long. But it’s better to be early to the game than late.”

Sowerby appears to like the ‘game’ analogy, referring to the “long game” that has brought Blue Sky to where it is today. The firm now has 75 staff with its head office in Brisbane – “out of the big city noise where we can employ talented people returning from elsewhere who are in their 30s with kids, have experience in alternatives, and have decided it’s time to go home”.

International expansion may be next on the agenda. Having set up a New York office two years ago as a “testing ground”, Sowerby indicates an interest in Asian locations such as Hong Kong, Shanghai and Beijing, as well as London. From small beginnings, the global footprint may be about to take shape.