All-star cast likely to include the fat lady

As Kelly Slater was knocking out Mick Fanning and Joel Parkinson in the finals of the Quiksilver Pro on the Gold Coast last week, there was another knock-out going on up the beach at Snapper Rocks. At one of the big beachside sponsor tents they were flogging property in the Maddison Estate Surf Precinct.

Maddison Estate, in the Gold Coast hinterland, was to boast the world's first Kelly Slater wave pool. Celebrity gardener Jamie Durie was aboard for the landscaping and Olympians Sam Reilly and Natalie Cooke were all-star ambassadors for the pool and the beach volleyball. Still are.

But anybody who signed up for a bit of dirt in the Maddison Estate may be interested to know Maddison is part of Peter Drake's $3 billion mortgage fund empire, which fell into the warm embrace of insolvency practitioners this week.

It was with the utmost valour that your correspondent waged war against the sinister forces of schadenfreude when the news came through; news, that is, that FTI Consulting had been appointed as administrator to LM Investment Management, the "responsible entity" for Drake's suite of mortgage funds. Drake is suing Fairfax Media for defamation.

Alas, the news was not so rosy for LM's swathe of investors. Having been savaged already by LM's rising fees and shrinking funds, now they confront the haunting spectre of management by some of the hardest fee-chargers in the insolvency racket. FTI Consulting is the old KordaMentha Queensland.

Unless investors can appoint an alternative manager to the LM suite of mortgage funds quick smart, it may be a case of "out of the frying pan, and into the fire". What can be revealed is that Peter Drake took out more than $25 million personally from the LM spaghetti mud-map of companies last year. Much of it came in management fees and the like via the entity LM Administration Pty Ltd.

That is a fair chunk of dough, in light of the fact that LM funds are now frozen. It is a tidy year's work. And it doesn't include that mysterious $16 million loan mentioned earlier this week - the loan that is from one of the LM funds, the Managed Performance Fund, to Mr P. Drake himself.

Investor sentiment is unlikely to be assuaged by the security of this loan, a personal guarantee by none other than Drake and a charge over the assets of Century Star Investments. CSI is a Hong Kong company belonging also to Drake and whose assets include a stake in Drake's LM.

There are essentially two views of this performance fund. One, from Drake and his supporters, holds that the fund is a unique opportunity to glean exposure to tip-top Australian property instruments with a net asset value of $356 million.

The other, held by the sceptics, is that the performance fund pays returns to investors from their own money and without new money coming in the operation might not be viable. And undeveloped property in the Gold Coast hinterland is not selling like hot cakes right now. Suffice to say, it might be a stretch to use the epithet "performance" when it comes to some of the assets of the performance fund.

For a start, more than 60 cent of the loans of the fund have been made to one project, Maddison, a project which just happens to be controlled by Drake entities, and which happens to be a second mortgage ranking behind Suncorp.

Gross realisable value for Maddison is $974 million, according to LM. The dastardly sceptics assert, however, valuations for similar developments in the area are in the vicinity of $30 million - a far cry from the $974 million and $234 million second mortgage. But let's not split hairs; according to a mezzanine financing document obtained by BusinessDay, some of the other loans are of a similar ilk - of a related-party or second-mortgage nature.

Never say never ... but the fat lady appears to have begun to loosen her vocal chords in preparing for her rendition of the Managed Performance Fund operetta.

We can see from this document that loan income is $61 million, interest income $3.3 million and management fees are $14 million (an humungous $10 million in fees goes to lucky advisers). Net income stood at $23 million for this period, the year to last June. Distributions were $90 million, up from $66 million in the previous year. Prepaid management and trailing fees rose from $8 million to $25 million. Asset valuations rose in the same period from $264 million to $363 million.

For LM investors the next few months promise to be a white-knuckled ride in the tradition of the Buzz-Saw at Dreamworld, just up the road from Maddison Estate on the highway between Brisvegas and the Goldie.