Last week, in a column published here, the Advisers Committee for Investors – a group which represents investors who are based outside of Australia – detailed what it said were “multiple failings” within Australia’s regulatory system and other problems that, it argued, led to the troubles at LM Investment Management that saw it placed into voluntary administration earlier this year and one of its funds being ordered wound up by a Queensland Supreme Court judge. The management of LMIM came in for some harsh criticism as well.
Below, Peter Drake, the founder of LMIM and one of its directors, tells his side of the story.
First of all, it has to be said that much of what has been written here and elsewhere about LMIM has been inaccurate, malicious and defamatory, although I do agree that this whole situation has seriously damaged Australia’s reputation as a well regulated funds management industry.
Secondly, I would like to stress that the LMIM group did not “collapse”, and certainly was not collapsed when the administrator was called in to take charge at LM Australia and LM Investment Management. I will come back to that.
First, a little background.
In July 2012 or thereabouts, we at LM became aware of a small entity called Trilogy, which had its eye on us. Trilogy – a Brisbane, Sydney and Melbourne-based fund management group – tried and failed to take control of LM funds by exploiting a loophole in Australia’s Corporations Law, which allows a rival fund manager to “pirate” another manager’s portfolio by convincing investors that they might be able to do a better job.
Thanks to the strong support of LMIM’s financial planners and the investors, Trilogy failed. Trilogy then, we believe, began seeking to “pull down” LMIM by damaging our reputation, so that they, in their own words could “take over”.
Last year, in a letter from our legal representative, our lawyers, Norton Rose, presented the Australian Securities & Investments Commission (ASIC) with evidence that Trilogy was passing itself off to investors and would-be investors as ASIC’s helper. With this letter, we provided ASIC with transcripts of Trilogy telling advisers how they would make up complaints against us, and forward them to ASIC.
ASIC never responded to this letter, either to our lawyer or to us.
Trilogy then – we have been told by investors – proceeded to run a worldwide campaign of mistruths about us, bombarding the LMIM offshore advisory database with misinformation, in what we believe was a deliberate strategy to bring down our 15-year-old international funds management business.
No action was taken against Trilogy by the regulator, and they remain in business today.
Why we chose to use FTI when we went into voluntary administration
The reasons we chose FTI to administrator our two companies – LM Administration and LM Investment Management – and the reason we chose to do it when we did, are as follows.
- The fallout from the Trilogy campaign against us, and other factors such as the global financial downturn, saw our global new business income drop to A$8m a month. It had been running as high as A$65m a month in 2008, before the global financial crisis hit.
- The bulk of all funds under management at LMIM were in pounds sterling, euros and US dollars, and all of it was hedged under forward foreign exchange contracts. The strengthening of the Australian dollar, by early 2013, was putting continued cashflow strains on the funds (trusts), due to margin calls by the FX providers.
- The strain on our cashflow peaked in March 2013, when the Australian dollar touched new highs against all three major foreign currencies. All spare cash in the funds was being used to protect the investors’ positions, leaving little to none for the management fees due to the manager.
It is important to point out here that up until that point, LMIM had enjoyed a fifteen-year run of successfully offering a range of investment products to a world investment base via licensed intermediaries.
Once FTI had come in and assessed the situation, though, they deemed that there were forward-looking insolvency issues for the manager, due to the restriction of the availability of cash from the funds.
On top of that, the damage that Trilogy was causing to adviser and investor confidence was, we believe, enormous.
So we had no choice but to appoint FTI as administrators, which we did, on 19 March, 2013. From that point, though, the reputational disaster for us, in the global marketplace, became even bigger.
In voluntary administration
FTI, it soon emerged, were not familiar with the funds management industry, property development or offshore distribution of Australian funds. This proved to be a disadvantage.
Our flagship “Managed Performance Fund”, for example, was wrested back from FTI by Korda Mentha in just one day in court.
Far from being a poor product, as some of our critics have suggested it was, the Managed Performance Fund (MPF) had an excellent history of providing regular income to investors, with no volatility in its unit price. The fund is a debt security fund, with significant property development assets.
All of the MPF’s assets had well-developed, working feasibility models that managed the working cashflow, and continually updated the gross realisation on each.
The fund management models were built over 15 years, were not unique to LMIM, and were considered mainstream in the funding of first mortgages and first/second mortgage development lending.
The MPF that Korda Mentha now controls has A$400m of investors’ funds, with gross realisable assets of approximately A$2bn.
Which brings me to another point, often overlooked by LMIM’s critics. It is this: The property expertise of LMIM’s team was recognised throughout Australia as being first class, and was responsible for the impeccable management of billions of Australian dollars over 15 years.
To say that the investments and commitment were outside the reach of the company and its fund manager is totally incorrect.
To date, none of the accounting groups, whether FTI or Korda Mentha, have asked for detailed presentation on the MPF assets by directors, and/or the specialist personnel attached to each asset.
Words like “last minute” and “pie in the sky”, when used to describe corporate valuations, are totally out of place, and based on the misinformed mutterings of a few.
Feasibilities would take months to come together, and were robustly checked and ultimately, audited. Credit committees with a wide range of expertise in property, development, collections, and property management were approving loans over 15 years with only a unanimous vote.
If the loan was deemed to represent an unacceptable risk, it simply was not granted.
The First Mortgage Income Fund itself – the one that the Supreme Court of Queensland has ordered to be wound up – was conservative, and targeted the bank borrower.
The Managed Performance Fund offered a higher return with the same category of borrower, but participated in the risks associated with the property development.
Tragically, Korda Mentha was handed the MPF by a Brisbane judge without taking into account that Korda Mentha did not have funds management experience, little property experience, no property development experience, and no access to funds to develop any of the fund assets.
FTI, meanwhile, has totally dismantled the LM Global funds distribution business, so everything is somewhat stranded.
Since the day LM appointed FTI, I have never once been sought out for an opinion, some history, or any discussion by anyone on any aspect of the vastly diverse business that, for 15 years, was LMIM.
What is more, nobody at LMIM – be they its board or the directors – have destroyed or absconded with millions of dollars.
Directors were paid transparently, with all payments recorded in the company accounts. I, being the only shareholder, received profit from LM Australia.
Over the years, many millions of dollars in profits were poured back into the LMIM funds, to offset unit price adjustments with regards to loans.
There is one loan to me from the MPF that was established circa 2001, for approximately A$1.6m, and was re-issued each year via the credit committee. It closed at $17m in 2013.
This loan was fully disclosed in the company’s accounts, and product disclosure documents, and was fully serviced by me from profits made by LM Australia.
This loan was of value to build the business of LMIM over the 15 years, secured by shares and a personal guarantee.
It was always there, always disclosed, and always known of to the licensed intermediaries.
The other “loan” that the media is lumping together is in fact a loan to me from LM Administration (that is, me), which is the distribution of “profit” to the shareholder.
This has nothing to do with the funds, and is a rolling process common to profitable businesses and the management of tax. The bulk of the LMA “loan” will be paid back out of 2012/2013 profit.
The accusation that I have accumulated assets through the use of wrongly received funds is totally incorrect and defamatory. With the exception of the disclosed MPF loan, all income earned by myself was from business profit only.
For the record, the last property acquired by myself on any entity related to myself was in 2003, as a part of my primary place of residence.
LMIM has conducted business over the past 15 years in a manner that was totally transparent and carried out with the assistance of the best professional advice available.
LMIM had a good working relationship with ASIC, our auditors, accountants, and the independent compliance committee, and all the records show this.
It is also known that all independent advisers, who used LMIM funds as a component of client portfolios, would attend “introducer day” forums, which enabled these advisers to make an educated judgment call on LMIM and its abilities as a fund manager.
LMIM only used licensed intermediaries to distribute LMIM funds across 76 countries. Selling directly to investors was never a part of our distribution strategy.
In summary, I am very concerned about the reputation of the Australian funds management industry, and the damage to what we promoted as a well regulated financial services environment.
Companies must not be allowed to cause reputational damage to other companies and contribute to their downfall, in order to benefit themselves, as we argue that Trilogy did to us.
ASIC needs to close the loophole that allows this kind of “piracy”.
Meantime, it is now clear, with hindsight, that the absolute mayhem that has gone on since the appointment of administrators has been akin to vultures fighting for their piece of a carcass.
LMIM was my creation, my life’s work, and even in its reduced state, it still is. I would do anything to bring a good result for its investors, and for the independent financial advisers who have had faith in LMIM and worked with us, some for the past 15 years.
Sadly, since March the 19, 2013, I have been a spectator like pretty much everyone else, trying to follow events through ongoing speculations, misstatements and defamatory remarks, promoted and sometimes distorted by the press.
Peter Drake is the founder of LM Investment Management, and a director of the company. He submitted this piece in response to a piece written by the Advisers Committee for Investors, which was published here on 15 August – click here to read it.
