The South Australian government is seeking “urgent advice” on its $50 million Venture Capital Fund run by Blue Sky Alternative Investments after the fund manager fell into receivership this week.
Blue Sky’s venture capital arm was appointed as manager of the new SA Venture Capital Fund in 2017. The fund was established by the former state Labor government to help innovative local companies “secure funding and accelerate growth”.
It has so far made two investments, in internet of things space startup Myriota and Kid Sense. The fund was established with the aim to invest in eight to 12 companies across 15 years.
The fund signalled a markedly different approach to startup support from the South Australian government, and was the first time a state government had set up a fund to make equity investments, rather than dishing out grants.
But the future of the fund is now in doubt, with Blue Sky Alternative Investments falling into receivership and suspending trading on the ASX on Monday.
Following the news, South Australian treasurer Rob Lucas said on Monday he had asked the committee overseeing the fund what the development means for the future of the state VC fund.
“The South Australia Venture Capital Fund and its arrangement with Blue Sky was originally established under former Treasurer Koutsantonis and the former Labor government, and it involves a contract of up to 15 years with Blue Sky Venture Capital,” Mr Lucas said.
“I have sought urgent advice from the SA Venture Capital Fund management committee, chaired by respected businessman Raymond Spencer, as to whether or not the events of today constitute either an insolvency event and / or a Material Adverse Change event under the terms of management agreement they have with Blue Sky.”
The government contract is understood to include a clause allowing the government to break the deal if there was a “material adverse change event” or a change of control. While the fund has only dished out cash to two companies so far, it is understood to be in “various stages of due diligence with 17 opportunities”.
The state-backed VC fund requires one-to-one co-investment from a private sector VC fund for each investment, and has a seven year investment period with an eight year exit period, running to 2032.
Blue Sky’s woes began in March last year when activist hedge fund investor Glaucus Research published a report accusing the fund manager of inflating its asset under management, a claim that has been repeatedly denied by Blue Sky. The report claimed that Blue Sky’s shares were 77 percent overvalued.
Since the report was released, Blue Sky’s market value has dropped from nearly $1.2 billion in late 2017 to $14 million, with its shares last trading at 18 cents.
In September last year Blue Sky secured a $50 million convertible note facility from Oaktree Capital Management, but as part of the deal the fund manager was required to maintain a minimum level of cash earnings. In February Blue Sky reported a half-year loss of $26 million, and on Monday Oaktree claimed that the fund manager had breached the financial covenant.
Oaktree has now appointed Mark Korda and Jarrod Villani of KordaMentha as receivers and Pilot Partners as voluntary administrators.
“The appointment follows a period of significant instability and uncertainty for all stakeholders, including further commentary regarding possible class actions, turnover of senior corporate executives and departure of certain limited partners,” KordaMentha said in a statement.
It’s business as usual for the operation of the company though, Mr Korda said.
“The appointment will not affect the day-to-day operating activities of Blue Sky and its investment management business subsidiaries. Existing management and key contacts for relevant stakeholders, employees and unitholders will continue to be in place as per normal,” Mr Korda said in a statement.
“It will also allow for greater flexibility for the restructure of Blue Sky and seek to ensure the future of the business as an alternative asset investment management platform.”
Blue Sky is also staring down the barrel of a disgruntled class action lawsuit, with a number of law firms on the hunt for unhappy investors.
Blue Sky has invested in a number of high-profile Australian startups and tech companies. This includes once-lauded startup Shoes of Prey, which ceased trading late last year and went into liquidation in March this year, in a further blow to the embattled fund manager.
Blue Sky was founded by former Queensland chief entrepreneur Mark Sowerby in 2006.