Fortress Profit Falls 45% on Decline in Hedge-Fund Fees

Fortress Investment Group LLC (FIG), the asset manager run by Dan Mudd, said third-quarter profit fell 45 percent as hedge-fund fees declined and it earned less on private-equity deals.

Pretax distributable earnings, which exclude some compensation costs and other items, were $43 million, or 8 cents a share, compared with $78 million, or 15 cents, a year earlier, the New York-based company said today in a statement. The decline wasn’t as steep as forecast by six analysts, who on average estimated profit of 4 cents in survey by Bloomberg.

Global hedge funds declined 5.6 percent on average in the third quarter amid volatile markets, according to the Bloomberg Active Indexes for Funds. Distributable earnings from Fortress’s credit hedge funds fell to a $1 million loss from a gain of $15 million a year earlier. Investors pulled $600 million from its liquid hedge funds.

“Third quarter was a pretty brutal environment from virtually every perspective,” Mudd, Fortress’s chief executive officer, said on a conference call with analysts and investors. “The challenges pretty much cut across sectors and markets and geographies.”

Assets under management fell to $43.6 billion from $43.8 billion at the end of the second quarter. Assets in private- equity funds dropped to $9.5 billion from $10 billion on June 30.

Market Volatility

The MSCI All Country World Index of stocks fell 18 percent in the quarter, while the Standard & Poor’s 500 Index, which tracks the largest U.S. companies, lost 14 percent.

Fortress’s distributable earnings don’t comply with U.S. generally accepted accounting principles. Under those rules, the company’s net loss attributable to Class A shareholders widened to $142.1 million, or 83 cents a share, from $94.7 million, or 62 cents, a year earlier.

Market volatility slowed the buying and selling of assets that boosted earnings for private-equity firms in the first half of the year. Sales of portfolio companies fell 54 percent from the record set in the second quarter as banks pulled back on lending and the cost of capital rose, according to London-based researcher Preqin Ltd.

Shares Gain

Blackstone Group LP (BX), the world’s largest private-equity firm and a bellwether for the buyout industry, last month posted an unexpected loss of $342 million on an 11 percent drop in the value of its buyout holdings. KKR & Co., which is scheduled to report third-quarter earnings tomorrow, is seeking as much as $6 billion for its second Asian buyout fund, a person with direct knowledge of the plan said last week. Both firms are based in New York.

Fortress rose 7.5 percent to close at $3.60 in New York trading. The stock has declined 37 percent this year. Blackstone is off less than 1 percent, while KKR is down 4.8 percent.

Today’s gain is probably due to investors focusing on the firm’s long-term planning rather than its earnings, said Robert Lee, an analyst at Keefe Bruyette & Woods Inc. in New York.

“The underlying business trends, when you get through the mark-to-market noise, remain positive,” Lee said in a telephone interview. “I think at the end of the day that’s what investors see.”

Asia Expansion

Fortress, which in February 2007 became the first large U.S. alternative-asset manager to pursue an initial public offering, is expanding in the Middle East, Australia, China and Japan, Mudd said. It started an Asia-focused macro hedge fund in March after Adam Levinson, co-chief investment officer of macro funds, moved to Singapore from New York.

Fortress said it raised $2.7 billion in new fund commitments this year, including $800 million for a new credit opportunities fund. Half of Fortress’s capital commitments come from outside the U.S., Mudd said.

“International penetration remains a key focus of our fundraising efforts,” he said. “We’re really seeing progress there and we’re going to continue to work on building this trend.”

In August, Fortress said its principals -- Wesley Edens, Peter Briger, Michael Novogratz, Robert Kauffman and Randal Nardone -- entered into new five-year employment agreements, effective Jan. 1. The firm also said it will reinstate a dividend of 5 cents a share beginning with the fourth quarter.

Asset Writedowns

Fortress wrote down the value of its private-equity portfolio by 6.4 percent in the third quarter and recovered “about one third” of that in October, co-Chairman Edens said on the conference call. He said he “soon” expects to begin raising a new general private-equity fund.

The company typically seeks a base fee of 2 percent for managing funds, though it has recently received an average 1.5 percent. Mudd called the gap a “reasonable increment” where Fortress is feeling pressured.

Private-equity firms pool investor money to take over companies by buying out shareholders, using mostly debt, with the intention of later selling the companies or taking them public for a profit. Hedge funds are lightly regulated pools of capital whose managers may buy or sell any asset. Managers of both types of funds charge fees and receive a portion of investment gains, traditionally 20 percent.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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