How to make millions out of nothing

FROM cradle to grave in four years. Rubicon is the textbook case on how to make connections, make a killing and get away with it.

The Rubicon model: exploit big contacts to establish an asset management company, float three externally managed trusts, attract some friendly press, use equity to raise debt, use both to go on a property spending spree, devise a baffling array of special vehicles, rip out as many fees as possible and often and large as possible, hold critical unit-holder meetings at Christmas, keep share prices up with share buybacks, sell down personal trust holdings, then flog it to Allco using board connections before the market tanks.

Thanks to the Allco deal, the men behind Rubicon pulled out $64million in cash. They may have already snipped another $50million to $150million in fees.

National Australia Bank appointed receivers to Rubicon Holdings on Friday. Rubicon Holdings owns Rubicon Asset Management, which manages the three listed disgraces - Rubicon Europe, Rubicon America and Rubicon Japan.

NAB has a $20million exposure to Rubicon Holdings and $170million in loans to the three listed trusts.

Rubicon founder Gordon Fell was late hopping on the financial engineering bandwagon but did not waste a second once aboard.

Together, the three trusts accumulated assets worth more than $5billion in two years. At their peak, their combined market value was $1.2billion. For the year to June 2007, Rubicon Asset Management, the private entity owned by Fell, Coe and Matthew Cooper, gouged $120million in fees.

The trusts were spruiked to the market as a safe investment in property boasting a high yield. Such was the sophisticated structuring and presentation, concocted by Fell and Cooper, that retail investors were easily duped.

The gearing levels were too high and the portfolios slapped together to exploit bull market conditions.

Rubicon America was the first, listing in 2005. Its ASX moniker, RAT, was apt. Rubicon Europe came next and Rubicon Japan in October 2006.

In each case, the underlying properties were impressively leased on a long-term basis and borrowings were similarly arranged long term, and at fixed rates, and hedged into Australian dollars.

In December 2006, however, RAT and REU acquired large mezzanine loan portfolios. Each was financed substantially from borrowings.

This was a material change to the business. They went from supposedly offering safe yields, to punts on somebody else's real estate debts.

Rubicon splurged on risky debt at the height of the cycle. Whoever was on the other side of those transactions will be thanking their lucky stars that a crew of Aussie wide boys fronted up and paid top dollar - other people's top dollar - when the market had run unsustainably hard.

Likewise, the offshore property players who sold assets into the Rubicon stable. After amassing all these overpriced assets thanks to the savings of their investors, it was time for the boys to cash out. The credit markets had already seized up.

In December 2007, the financial services business of Rubicon, which was mostly the management rights to the three trusts, was sold to Allco Finance Group for $260million.

Struck at the very apogee of the bull market, the deal enabled Rubicon founder Fell to pull out $28million in cash and splash roughly the same amount on a mansion on Sydney Harbour, in his wife's name, as soon as the transaction was settled.

Not only was Fell also an "independent" director of Allco but Allco executive chairman David Coe was also a co-founder and 20% shareholder in Rubicon.

While the deal was being pushed through, there was a share buyback going on in the three trusts. The Rubicon crew also sold down their personal holdings in the trusts.

Once the deal was signed, and the buyback finished, the unit prices began to tank.

A year later, Rubicon is in the hands of receivers.

Were trifling matters of conscience, integrity and reputation not an issue, you would have to hand it to Fell, Coe and Cooper.

They built a big business from a standing start in three years using other people's money - debt from banks and institutions and equity from retail investors who had no hope of understanding the structures - and flogged it to minority shareholders of Allco before Allco itself bit the dust.

They managed to get Allco directors and Grant Samuel (the "independent expert") to sign off on the deal then escape. All along, the trusts were designed to optimise income for the manager at the expense of the investors. Fees were clipped for raising equity, borrowing funds, acquiring assets, selling assets and for ongoing management.

This was an engineered profit machine destined to collapse once the market turned down. The pace of acquisitions and the convenient sale to Allco all point to a legal sting that is. You had to look hard but the extortionate fees and conflicts of interest were disclosed. The Rubicon documents were top-notch and all the elite professional names such as Grant Samuel, KPMG and PwC tossed in their imprimatur for a bag of silver.

In November 2007 the big announcement came. Allco said it intended to acquire Rubicon for $260million, including $64million in cash and the balance in Allco shares.

There was a minor backlash and a consequent adjustment to terms and valuation.

The vendors were Gordon Fell 45%, David Coe 20% and Matthew Cooper 15%, the balance of the shareholding was already owned by Allco.

The cash portion of the sale price was subject to early settlement. That occurred shortly before the Allco share price imploded and on the eve of the Fells buying a $28million shack in Point Piper.

That's how you do it.

mwest@fairfax.com.au