Bluestone’s second wind

The fate of capital markets has forced low doc lender Bluestone Group’s Alistair Jeffery’s hand. He tells AMANDA GOME how he is effectively starting again with new ownership and a new business model.

By Amanda Gome

The fate of capital markets has forced low-doc lender Bluestone Group’s Alistair Jeffery’s hand. He is effectively starting again with new ownership and a new business model.

In 2003, entrepreneur Alistair Jeffery did a risk management plan for Bluestone Group, his three-year-old specialist lender that focused on non-conforming mortgages such as low doc loans and reverse loans to retirees.

He rated the collapse of the capital markets a fatal blow to the company, but very unlikely to happen. Of course the worst has now occurred and put Jeffery’s business through the wringer.

As one of the biggest Australian victims of the US sub-prime fallout, Bluestone has been forced to halve staff numbers and has lost a big investor because the money that Bluestone lent to its customers has dried up.

So how has Jeffery set about rebuilding? He tells Amanda Gome what it feels like to be running a start-up again, and how he is risking his personal wealth once again – but why it is easier the second time around.

He is happy to answer your questions. Email feedback@smartcompany.com.au

Amanda Gome: You are in a highly risky business. But you always told us that your loans were securitised, which meant you slept at night. Now the securitisation market has collapsed. Could you have seen this coming?

Alistair Jeffery: We tried. We had an offsite in 2003 and listed risk factors, and graded them in a matrix of low, medium, high and fatal. There were two items in the fatal; one was the capital markets shutting down. We rated it a very low risk.

When was it clear that Bluestone was in trouble?

We could see that origination was becoming very difficult in July last year. I was in the US and it became very clear that the non-conforming markets were shutting down at the end of last year.

We got to a position where we approached the shareholders to ask whether they were interested in the new direction or an exit.

Six weeks ago we said to them here is the new direction of business.

What is the new direction? You are relying on growth that does not rely on capital market funding?

We are raising $5 million to $10 million for an aggressive push in a new direction.

The focus is on a subsidiary called Bluestone Servicing that has $3 billion of loans for mainly self employed customers. It handles customer inquiries, internet banking services. Also arrears management is another portion of Bluestone Servicing.

We built it in 2005, invested $5 million and it now makes a $3.5 million profit; it’s a cracking business.

The second part of the business will be looking after other people’s loans portfolios. We are looking for another portfolio of loans that we didn’t originate but we could look after.

You have just done a management buyout of Bluestone Group. Why?

It was an opportunity to get a controlling stake in the business back again.

I am used to the share register changing. When we started in 2000, I was 100% owner of the business for one week and we have been diluting down ever since. Within a month I was down to 87% as our first funder took options, then went down to 75% as we raised the first round of equity, and then 55% in 2001 as we took a second round of equity.

In 2005 we created an opportunity for ABN Amro to come in and we sold from 40% to 25%.

Why did you create that opportunity?

It was de-risking. I had a lot of capital tied up in Bluestone and was interested in an exit for myself. Other shareholders were also interested in an exit.

Now ABN Amro has sold down its stake and a subsidiary of HBOS Australia has funded the management buyout….

Yes. We went to ABN about the new plans and they said they existed to do large investments, not early stage ventures. But HBOS was great.

Now management has 75%, HBOS has 15% to 20%, and other shareholders the rest.

Did you wait until shareholders raised the future of Bluestone with you or were you proactive?

You can’t wait. I wrote a 25 page business plan setting out the vision for the future and why it was a good transaction for shareholders. You have got to be convincing and compelling as you describe the vision for the future.

Is it better to have fewer shareholders?

I know some entrepreneurs think otherwise but I like having shareholder partners as it was more fun to rely on them and get their support.

Are there benefits in having more control again?

Yes. The MBO means we can appoint the majority of directors on the board.

It makes operational decisions and changes to strategy so much easier and quicker to do. We used to be run like a public company.

I used to spend probably two days getting ready for a board meeting. The four weeks leading up and then the few weeks of discussion afterwards slowed things down.

We still have a formal board structure but I nominate three of the directors now.

Do you feel dispirited as an entrepreneur to have to take such a step backwards? Or do you feel ready for the new challenge?

Business owners are great at having to navigate through the unknown. And we are navigating. You have to approach a challenge with that mindset. All businesses go through moments like this.

What is the size of Bluestone now?

On the balance sheet we have $35 million of shareholder’s equity and we are on track to make a profit of $4 million to $5 million for end of financial year 2008. The loan book is $3 billion.

We peaked at 200 staff and now we have half the level. It is smaller but size isn’t everything. It feels more manoeuvrable. Everyone still gets together every second Monday and everyone gets briefed as to what’s going on.

You say you are basically doing a start up again. Is it easier the second time around?

It is much easier, although whether we will be successful only time will tell. But what helps is the fact that everyone has had an opportunity to make money. We have created opportunities for exit and that gives people confidence. It is very important to create those opportunities.

How about taking on more risk again?

That’s hard. I am re-risking. I have put 40% of my personal net worth on the line again. That feels like a comfortable maximum amount to be exposing in an early stage venture.

Have companies like yours changed the capital markets for good? Or do you think we are going to go back to more conservative times where only the major banks lend money to higher risk groups?

We have (changed the capital markets for good).

In the UK in the early 90s you saw securitisation created as a product type. I often comment that we are doing Capital 2.0 like Web 2.0. It’s here to stay.

What are you seeing for the economy? Difficult times ahead?

Right now the flows of capital have slowed right down. The banks are not lending when it comes to challenging lending propositions. They were lending indirectly via us, but not now.

I am quite bearish for a year or two. There will be a slowdown and you have to hunker down for that and work out how business will perform and behave; look for the opportunities and focus on things that are resistant to the slowdown.