Livewire recently caught up with the Managing Director of Blue Sky, Rob Shand in our Sydney studios. In a wide ranging interview we covered his experience of building Blue Sky from a small business through to becoming a $3BN private markets powerhouse today. Throughout our discussion Rob talked about the importance of developing a strong team who've got the fortitude to 'tough it out' when required. It's so important to the team at Blue Sky that they hang a Calvin Coolidge quote in the entrance of every office on the topic that says “Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not: unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.” We hope you enjoy the interview.
Rob, you started your career at Bain & Company. What was that experience like and what did you learn?
I think the main thing for me out of the six or seven years I had at Bain was just the exposure that I got to some of the management teams and CEO's of the top businesses both here in Australia and overseas. I worked with Bain in Sydney and Melbourne, as well as in Tokyo, London and Johannesburg. Locally, I got to work with companies like Telstra in their enterprising government division. That was headed by David Thodey at the time, and one of his core management team members was Nerida Caesar. To see those people work and operate up close at an early stage in your career, was really powerful.
Then straight after Bain you moved directly to Blue Sky. What was the experience like moving from a big multi-national into a small business?
It's obviously a very different environment. You just don't have those same structures in place in what was a small private business at the time, versus these large multinationals, but what I really liked was you could make a big impact. You could make decisions very quickly, and you could see the impact of those decisions almost instantaneously.
What really attracted you to Blue Sky and the team?
Two things that really drew me to Blue Sky. Firstly, I could see just how big this business could be in time. I'd worked at Bain, the largest management consulting firm to the private equity industry globally. I'd worked advising private equity companies both here in Australia, in Tokyo, and in London, so I'd seen the growth in alternatives on a global basis. I could see that that was going to play out in Australia, and to have the opportunity to be part of a diversified alternative asset manager, that was pretty exciting.
The second thing that drew me to Blue Sky was the team.
It is genuinely a world-class team, but coupled with that, a team of people that just have the utmost integrity, and also humility. I think the combination of those three characteristics is actually pretty rare, and very interesting to me.
How has your role and the business evolved since you've been there?
So I joined Blue Sky in 2010, a couple years prior to our listing. I joined as part of the private equity team, but in 2011 I was asked by Mark Sowerby, the founder of Blue Sky, to help him prepare for the listing of Blue Sky. I got to work very closely with him and continued through 2011, 2012 and onwards to work very closely with Mark. That lead to my appointment as COO in 2013, then ultimately lead to me being appointed Managing Director in 2016.
During that time what have been the biggest challenges that you've faced whilst you've been at Blue Sky?
The listing itself was very hard, and hard for a whole range of reasons. One, we were a small business at the time. We listed as an entry, it wasn't an exit. There wasn't people taking money off the table. We had a market cap of $30 million, so it was hard to get on the radar of a lot of groups.
Secondly we listed in January 2012, and if you remember back to those times, there just wasn't a lot of businesses getting listed at that point.
Thirdly our business model in the Australian context is unique. It's common place overseas, there's lots of businesses like ours in the US and in Europe, but in Australia it's unique. A lot of investors just weren't sure what they were getting, so that made it hard. Then finally, we just didn't get a lot of support. We targeted a raise of seven and a half million dollars, and we end up raising six and a half, so we got enough to list, but certainly didn't get where we wanted to. Of that six and a half million dollars, we raised virtually all of it ourselves. So a lot of long nights, a lot of heartache, but we ultimately got there.
We listed with a share price of a dollar, and that ended up dropping over the subsequent six to 12 months, and I think it bottomed out at about 78 cents. We were getting a whole bunch of criticism externally, people that said we shouldn't have listed, people that just didn't think that we'd make it. So there was a lot of external pressure. Internally over that subsequent 12, 18 months we lost three members of the team.
So we had these external pressures, we had these internal pressures, and as I said it was hard. We came through that and I now know I've got a team that can stick it out through the tough stuff, and a team that's really galvanised, a team I can trust to deliver. So it was an important period for us.
It must be really satisfying to have ridden that out and to be where you are today. I've heard you talk previously about being located in Brisbane giving you an advantage because it gives you great access to the talent pool up there. How do you attract the best candidates and get the most out of them?
Being headquartered in Brisbane certainly helped at the start, but it's far less relevant these days. We've got a team of 100 people, and that team is spread across Brisbane, Sydney, Melbourne, Adelaide and New York, so that's far less relevant today, than what it was 10 years ago. I think what really attracts people to Blue Sky today, are the same two things that attracted me.
They've seen us grow from effectively nothing to $3.25 billion in AUM, but at the same time you can look overseas at other businesses with the same sort of business model. You've had Blackstone grow from US$400 million back three decades ago to US$370 billion today. You can look at Europe, groups like Partners Group that have grown from nothing to €60 billion, under management today. People look at us and see that we've grown from nothing to $3.25 billion, but you know that's just the start. So I think that opportunity in the alternative space is something that attracts a lot of people.
Then the second thing that attracts people is the team. I think there's that saying that “A graders only really like to work with other A graders”, and I think that's true. I focus very heavily on that. My simple point of view on it is, it's actually quite easy for people to invest anywhere in the world these days, so it's not good enough for us to just be the best in Brisbane, or the best in Sydney, or the best in Melbourne. We've got to be world class, otherwise investors will take their money and invest with people that are world class. So I drive that into the team. We have a very high bar in terms of the people that we recruit, and as a result we have a very high quality team that attracts others that want to work in that sort of environment.
You've managed to record returns of 15.7 percent over 10 years. What do you think has been the main driver of those results?
I put that down to three things really. One is we've got a very strong investment focus on what we call the essentials. So we're focused on investing in sectors like food and water, like education, like health care, like retirement. These sectors may not be the latest fad, they may not be that sexy, but in terms of generating solid returns over the long term, and we are by definition long term investors, we’re investing over five, 10, 15 years, that's set us in a good spot, so that's the first thing.
The second thing is the alignment that the team has with our investors. Our team invests into all of our funds on exactly the same terms as our investors. So they're not just incentivized by a performance fee to outperform, but they've got real skin in the game. So they're incentivised to protect the capital, to protect our investors capital and protect their own capital. Avoiding those blow outs by protecting capital has been an important part of the reason we've got the track record we do.
The third reason for our track record I think is just around the proprietary deals that our business attracts. Why do we get that proprietary deal flow when others don't? It's actually due to our investor base.
55% of our AUM comes from high net worth individuals, family offices, sophisticated investors. There's literally thousands of them that invest with us, and not only do they invest with us, they also bring us deal flow.
If the only source of deal flow that you're seeing is deals that have been shopped around, and shopped around to lots of groups, then inevitably you're going to end up in an auction. Inevitably you're going to be bid up in terms of the pricing that you're paying on the way in. If you're not paying good prices on the way in then it becomes very tough to generate solid returns. So getting that propitiatory deal flow and paying reasonable prices for the assets that we're investing in I think has been critical to our track record.
You mentioned avoiding the blow ups, how does Blue Sky avoid the blow ups?
It's a product of where we're investing once again, so as I said we have a very strong focus on investing in the essentials. Investing in stuff that people need, not stuff that people want. So food and water, education, health care, these sorts of sectors. You couple that with our style of investing, so if I talk about our private equity business as an example, we do two things in private equity, we do expansion capital and we do late stage venture capital.
So we're not doing start up investing, we're not doing early stage of venture capital, where you know by definition there are a lot of blow ups that's part of the course in that part of the market. Likewise, we're not an LBO shop, we don't use lots of debt in our investments, in fact the majority of investments have no debt whatsoever. If you're not highly leveraged then when things do get tough, given that our investment is actually going onto the balance sheet of our companies, they end up in a pretty good position.
Rob the growth in the alternatives industry over the past five years has been huge. You mentioned in the past that Blue Sky took nine years to grow AUM to $1bn, but have added another $1bn in AUM over the past 12 months. Do you see this strong growth continuing and why?
Simply put, yes. There's a couple of reasons for that, if we wind all the way back and just talk about the industry that we operate in to start with, it's an enormous industry in Australia. The fourth largest funds management industry in the world, and growing at nine and a half percent per annum. So, that provides a nice structural tail wind behind our business. On top of that, what we're seeing as a trend over the last 20 years now, is allocations to alternatives rise. 20 years ago it was about 5% of the overall market, and today it's about 20%. It's forecast to grow and to be the largest asset class in Australia within the next decade, to catch up to international norms of 24, 25% allocations. So for a business like ours, where we focus on that alternative segment, to be in a massive overall industry and in the fastest growing part of the industry, now that's a great background for us to have as a business.
In terms of our overall growth, you know we are attracting a lot of capital, both from high net worth's, family offices, but also institutions, both here and off shore. I think provided that we continue to focus on generating really solid investor returns, continue to focus on generating good proprietary deal flow in those well underpinned sectors like health care, like education, like food and water, I think we'll be in a good spot.
Even though allocations to alternative assets have grown within Australia, they're still really lagging in comparison to the global levels. Why do you think it's been such a tough sell domestically?
I'd put that down to a couple of things. The first is the branding of the word ‘alternatives’. I just don't think that resonates particularly well with Australian investors. It makes people think it's risky, or it's different, or it's hard to understand. If you actually look at what we do at BlueSky its none of those things. What we're actually doing is just investing in private markets, investing in private businesses, private real estate opportunities, building retirement villages, building student accommodation, investing in private agricultural opportunities. So it's partly that word ‘alternatives’ that has held some people back. There's an education piece that's been happening over the last couple of years here.
Then the second thing, no doubt historically Australians have had a love affair with public markets, and listed securities. There's absolutely nothing wrong with listed securities, but I think people are becoming increasingly aware that structurally, if you look at the Australian stock market, you know it's dominated by four big banks, two retailers, two mining companies and a handful of others, but not a lot of others.
I think investors are realising if they want a really diversified portfolio, they actually have to look outside of the Australian stock market for those alternatives, and they're looking at private markets.
So it's a rebrand that's required?
Effectively that's part of it, but it's also people looking for opportunities. I think people have worked out that the opportunities in private markets are enormous. If you exclude the tiny stocks on the stock market, those with a market cap less than $30 million, there's about 1000 companies out there. If you look at all the privately listed businesses in Australia, just take those that have, you know in our sweet spot, employee numbers between 20 and 200 employees, there's 50,000 of them. It's a materially different and materially larger opportunity set for us to be investing in.
You've opened an office in New York, what are your global ambitions and are you planning on competing with the big players?
As a business, frankly we are focused on Australia. We've said publicly that we are at $3.25 billion in AUM, we can grow to $10 billion and we can grow within our existing asset classes. Frankly, we could do that just with what we're doing in Australia. Now the reason we went to New York originally was to attract institutional investment from North America. We think it's a potentially dangerous place to be if your only source of capital is from one geography.
That's played out very well for us, and I expect we'll continue to grow. Off the back of that in New York, we're now investing as well, investing in private equity, investing in private real estate. We've got some of our hedge fund team over there to. So we've built that off the back of attracting institutional investment there. We will look to attract and are attracting institutional investment from Asia, and from Europe. That's been the strategy for our overseas expansion.
How do you differentiate yourself in those markets?
I think primarily looking to raise capital from these markets. Overseas institutional investors look at Australia and it is a very attractive place to invest. It's on the doorstep of Asia, it's seen the rise in population in Asia, they've seen the rise of the middle class. Australia is world class at a couple of things, like agriculture for example. For an institutional investor offshore to get exposure to that sort of thematic, they can do it in a country which they'll view as safe, with good governments and regulatory regimes, to get exposure there is pretty exciting for those groups.
You've got your annual investor day coming up in Brisbane in November, what message will you be delivering at that?
Our investor day is coming up, it's on the 30th of November, we host that in Brisbane each year. We had over a 1000 people there last year, and if you would have talked to anyone that was at that investor day and has been in past years, they'll tell you if you want an insight into BlueSky and how the business is performing, how investments are performing, that's the single best day of the year to do so. A lot of companies that run similar sorts of forums are tempted to roll out the two or three or four best investments that they've made and put those up in lights. We don't do that. We bring all of our investments to our investor day, and provide the opportunity for our investors, for our shareholders, and for those that are interested in our business to come along and talk to those groups directly. So it's a really powerful way to understand the breadth and the depth of what we're doing, and how it's performing.
In terms of my message, it will be more of the same, which is exactly the message that came through in our full year financial results for FY17. I think if we continue to focus on investing in the essentials, continue to focus on private markets, and continue to focus on generating good investor returns then we're in a good spot.
Rob to wrap it all up, what's your 10 year vision for Blue Sky?
Our overall vision in a nutshell is simply to be the preeminent alternative asset manager in Australia. We've talked about $10 billion as a target, we'll be well through that within the next decade, far shorter than that actually. But to be the preeminent alternative asset manager in Australia, that's what we're targeting.
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Nice insightful interview.