Fortress Investment Group LLC (FIG), the first publicly traded private-equity and hedge-fund manager in the U.S., said second-quarter profit rose 16 percent as the firm earned more money from selling holdings.
Pretax distributable earnings, which exclude some compensation costs and other items, increased to $172 million, or 39 cents a share, from $148 million, or 30 cents a share, a year earlier, New York-based Fortress said today in a statement. The results beat the 37-cent average estimate by five analysts in a Bloomberg survey.
Fortress is benefiting as rising stock markets lift the value of holdings, offsetting the impact of losses at some of the firm’s hedge funds. The firm took advantage of the rising markets to sell stakes in German homeowner Gagfah SA and Brookdale Senior Living Inc. (BKD), adding $91 million to distributable earnings in the quarter.
“A big part of the story for the quarter was private-equity realization activity,” Chief Executive Officer Randy Nardone said on a conference call today with investors and analysts. “We’re actively working to make these assets worth more as we prepare to monetize them. We expect that realizations will continue to trend up in the next few years.”
Fortress fell 2.4 percent to $7.24 at the close of trading in New York as the broader stock market slumped. Fortress, which, went public in February 2007 at $18.50 a share to become the first U.S.-listed buyout and hedge-fund manager, has declined 15 percent this year.
The firm’s businesses include private equity, credit, liquid hedge funds and a traditional-asset management unit called Logan Circle Partners, the largest by assets under management. Fortress’s assets rose to $63.8 billion from $62.5 billion at the end of the first quarter.
The private-equity business, which manages $13.8 billion in assets, is raising a new buyout fund, Wes Edens said on the call. Edens, a Fortress co-founder, said the firm is preparing to have an initial close of the pool with outside investors and may list the vehicle to trade publicly.
“It’s something we’ve given a lot of thought to,” said Edens. “I think of it as the next generation of private-equity fund and one that fits well the nature of our activities.”
Fortress’s most recent main private-equity fund, raised in 2007 before the onset of the financial crisis, was generating an internal rate of return after fees of 4.4 percent as of June 30, according to a regulatory filing today. Its predecessor vehicle had a 2.7 percent net IRR as of the same date.
Fortress’s distributable earnings differ from U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company’s net income attributable to Class A shareholders was $31 million, or 12 cents a share, compared with a loss of $2 million, or 1 cent a share, a year earlier.
Fortress’s macro hedge fund, which invests across products and geographies, lost 3.2 percent this year through last week, and the company’s Asia macro fund declined 4.8 percent.
The firm in June hired two foreign-exchange specialists to bolster its liquid-markets business. It said Citigroup Inc.’s Jeffrey Feig will end a 25-year career at the bank to join Fortress as co-chief investment officer of the macro funds alongside Mike Novogratz. Fortress also hired Christopher Fahy, a former Deutsche Bank AG currency trader.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
Fortress plans to pay stockholders a dividend of 26 cents a share on Aug. 15.
To contact the editors responsible for this story: Christian Baumgaertel at firstname.lastname@example.org Pierre Paulden